CROWDFUNDING POTENTIALS IN DEVELOPING COUNTRIES WITH NIGERIA AS A CASE STUDY

ABSTRACT

This study investigated the crowdfunding potentials in developing countries. The study utilized Nigeria as its case study. Crowdfunding has become a new phenomenon of raising capital for business. Crowdfunding is prevalent in developed nations, while it is just getting popular in developing countries. As a new form of financing opportunity, the key knowledge of the concept is lacking on the part of entrepreneur, the financial expert, academicians and the general public. This calls for better understanding of the concept, models, element and environmental characteristics for its implementation and usage by entrepreneurs. It is against this background that the study examined crowdfunding as alternative sources of finance for SMEs. The study employed an exploratory research design with focus on literatures on the field of accounting and finance relating to the topic. The study concluded that one of the innovative ways for SMEs and creative ideas initiators becoming increasingly important and irreplaceable in promoting economic development is to improve on method of financing through crowdfunding as this had contributed to growth of SMEs in some developed countries. However, in Nigeria, there is the need for government to provide the regulatory framework and awareness that will support crowdfunding with good internet network for interaction between the promoters and investors.

 

 

CHAPTER ONE

INTRODUCTION

1.1       Background of the study

In the last few years, crowdfunding has emerged as a source of a channel of funding for startups, especially in developed countries like the United States of America, the United Kingdom, and Germany (Tu, Anh & Thu, 2017). The crowdfunding industry has developed mainly in Europe, Australia, the United States, and Canada, and thus public policies and regulatory instruments have mostly been created in these countries. In 2015, the distribution of total funding volume worldwide was markedly uneven: North America raised 49.94% of the total; Asia, 30.6%, Europe, 18.81%, South America 0.25%, Oceania 0.19% and Africa 0.07% (Leon, & Mora, 2017). Recently, crowdfunding has become an increasingly viable option for traditional sources of early-stage capital. The most recent global crowdfunding industry report an estimated crowdfunding volume in 2015 at $34.4 billion worldwide, increasing from $16.2 billion in 2014 and $6.1 billion in 2013 (Massolution 2015). The sector revealed continued growth in 2016 to a market volume of $35.2 billion in the United States alone, with over 218,000 businesses across the United States raising funds from online alternative finance channels in 2016 (Ziegler, Reedy, Le, Zhang, Kroszner, & Garvey, 2017).

Crowdfunding is not necessarily a new fundraising method, but harnessing the power of the internet has given the concept a new dimension which provides an opportunity for entrepreneurs to taps into the financial resources of the crowd. The funding method is now widely regarded as an alternative source of funds to both SMEs and creative ideas. Crowdfunding is enabling individuals/entrepreneurs to raise capital to fund businesses and creative ideas/projects, (Mollick, 2014; Ahlers et al., 2016; Wieck, Bretschneider & Leimeister, 2013); access capital and other resources which otherwise they would not have obtained for entrepreneurial activities, (Assenova et al., 2016; Fleming & Sorenson, 2016). It is popular in the United States, UK, France, Netherlands, etc.

Crowdfunding can be defined as the method of taking a project or business that needs investment and seeking a large group of people to contribute to this investment. This idea has seriously become popular of recent and, as a result, is now presented as a viable option of funding projects and businesses (Forbes & Schaefer, 2017). Crowdfunding makes individuals provide a firm with financial assistance. It takes place through the social network, internet especially, with the entrepreneur detailing the business activities and objectives in some cases the form of a business plan and requesting funding under specific terms and conditions (Lucia, 2015). In broad terms, crowdfunding can take the form of Donations, pre-selling or pre-ordering, Reward or Sponsorship, lending, and Equity (Hermer, 2011; Mitra, 2012). The definition of crowdfunding is still evolving and, therefore, open for discussion (Forbes, & Schaefer, 2017). Though reference is made to crowdfunding as an innovative method of funding, crowdfunding’s basic idea is not new. An example mentioned from time to time on crowdfunding is the Platform for the sculpture of Liberty. The publisher of the New York’s newspaper called the ‘World,’ Joseph Pulitzer in 1885, requested the people to contribute financially to the erection of a statue. He then chose to print the names of the contributors at the back of his newspaper. Within five months, the sum of $102,000 was realized. 80% of donors were people that contributed less than US$1of the total amount (Harris, 1986). Also, recently in 2008, during the US Presidential campaign, President Barack Obama campaign team raised about US$750,000,000 through crowdfunding. About half of the contribution was from people that contributed less than US$200 (Kappel, 2009).

It has been commonly agreed among researchers, that the origin of crowdfunding is the broader concept of crowdsourcing (Belleflamme, Lambert & Schwienbacher, 2014). Crowdfunding has been gaining attention since 2007 in theory and practice. Different researchers have investigated crowdfunding all over the world by revealing new insights in this up-and-coming research field and thus creating many views. The crowdfunding market is still growing. Nonetheless, crowdfunding has not reached its full potential (Gierczak, Bretschneider, Haas, Blohm, & Leimeister, 2015). Crowdfunding is a form of microfinance that has been around for years; however, the Internet’s emergence has broadened its use (Helmer, 2011). Crowdfunding is represented by a growing number of internet sites called crowdfunding platforms, devoted to the service (Gedda, Nilsson, Athen & Soilen, 2016). According to Hussain and Haque, (2017); Mendes-Da-Silva et al., (2016); Freedman and Nutting, (2014), crowdfunding became important as a result of the 2008 financial crisis in response to the challenges faced by early-stage enterprises in generating the funds. Since then, crowdfunding has spread across the developed world and is now attracting considerable interest in the developing world. Crowdfunding marks a new trend for SMEs and individual entrepreneurs to find financial resources in an internet-dominated era (Zhao et al., 2017). The crowdfunding platform kick-starter alone funded 22,252 projects in 2014. (Boudreau, Jeppesen, Reichstein, & Rullani, 2015). The main reason for an entrepreneur to engage in crowdfunding is to raise capital, obtain attention, and get feedback. (Giudici et al., 2012). Unlike venture, capital crowdfunding raised small amounts from a large number of investors instead of a large amount from a few investors (Gabison, 2015). Crowdfunding communities are built on a framework of trust that discourages moral hazard through traceability and social engagement (Leon & Mora, 2017).

Crowdfunding is a form of a new way of fundraising that is growing rapidly. Crowdfunding is a worldwide trend that accounts for significant sums of money and is just in the early stage of development. The generality of people is coming to terms with the advantages it offers. Consequently, it has developed to be another capital source for entrepreneurs that need capital for financing (Andersen & Mauritzen, 2015). Crowdfunding is an inventive and somewhat recent idea that brings together entrepreneurs and investors via the Internet. This new way allows the entrepreneurs to receive funds through the Internet by “open invitation” to finance their projects/ventures and thus raise the necessary funds by relatively small contributions of a relatively large number of investors. Crowdfunding is a fast-growing phenomenon seriously in debate among academicians (Rodriguez-Ricardo, Sicilia & Lopez, 2017). What drives crowdfunding participation? The influence of personal and social traits. Spanish Journal). Access to finance is an important topic, particularly among firms in the early stages of growth. Personal funds are not enough to start a business, and Bank credit is often not always available. The answer to this challenge may be found in innovative solutions for raising financial resources for business ventures. These solutions have originated thanks to the rapid development of information technology. Crowdfunding, i.e., financing through small amounts paid by many individuals, is one example of these solutions (Rak-Młynarska, 2017).

Crowdfunding research investigated the principles and interactions of donors, backers, or investors, often equated as the “crowd” with projects initiators, entrepreneurs, artists, or any individual or organization seeking financial support via platforms (Short, Ketchen, McKenny, Allison, & Ireland, 2017; Salahaldin, Angerer, Kraus, & Trabelsi, 2018; Niemand, Angerer, Thies, Kraus, & Hebenstreit, 2018).

As argued by Giudici et al. 2012, Salahaldin, et al. 2018 and Niemand, et al. .2018, crowdfunding research is in its infancy and has two main characteristics: first, it is its interdisciplinary nature, because it is a blend of finance, economics, and management, sociology and information systems; the second, it is being discussed both inside and outside of the traditional academic discussions and debates about the crowdfunding can be found in scientific and professional articles, popular books, newspaper articles, and Web portals. The fast progress of crowdfunding has led to more considerable research attention from researchers (Xu, Zheng, Xu, & Wang, 2016; Macht & Weatherston, 2014). Interrelated literature comes up fast from different disciplines, majorly from management, entrepreneurship, economics, and management (Moritz and Block, 2014). After the growth of crowdfunding platforms, quantitative studies began to emerge as intermediaries, which provided data on crowdfunding project transactions (Mollick and Kuppuswamy, 2014). Across the majority of the academic work on crowdfunding success guidelines, the only research method is quantitative. Song et al., for example, base their research on a “database of 127 consumer electronics” projects. Finally, “The Determinants of Crowdfunding Success” by Cordova & Dolcib, 2015). concludes “1127 technology projects”. This paper will use qualitative methods to find new conclusions. Crowding funding is gradually gaining ground in Nigeria; no wonder the security and exchange commission is working towards a guideline to monitor crowdfunding activities in Nigeria. Currently, the guidelines are at the exposure draft level.

 

1.2       Statement of problem

Lending from banks is the most familiar source of external finance for many SMEs and entrepreneurs, often relying on straight debt to fulfill their startup cash flow and investment need (Lucia, 2015). Traditional bank finance poses challenges to SMEs and may be ill-suited at specific stages in the firm life cycle (Lucia, 2015). In recent times, the phenomenon of crowdfunding has become a popular source of finance for business owners who seek to finance their business ideas (Mollick, 2013). Crowdfunding allows the entrepreneur to disregard traditional sources of funding and reach out to the public for funding (Arkrot, Unger & Åhlström, 2017).

Entrepreneurs mention the ‘availability of finance’ as the second most pressing problem for small and medium-sized enterprises (SMEs) (European Commission, 2000; Ipsos, 2013). Startups face the same financing problems as SMEs ((Moncada-Paternò-Castello, Vezzani, Hervás, & Montresor, 2014) crowdfunding may offer an alternative method of funding for SMEs and startups (Collins & Pierrakis, 2012) and a stop-gap solution (Collins & Pierrakis, 2012) Crowdfunding bridges the financing gap between (small) loans from friends, family, and banks and (large) financing from venture capitalists (Collins & Pierrakis, 2012). In the wake of the worldwide economic crisis, crowdfunding has become an increasingly significant alternative form of financing (Kuti, & Madarász, 2014). SMEs have sought new ways to finance their startup without dealing with traditional sources like banks and investors (Mollick, 2013), making entrepreneurs try new financing methods such as crowdfunding (Mollick, 2013). This financing issue led to the new popular crowdfunding movement (Belleflame et al., 2014). Crowdfunding belongs to the alternative finance sector, i.e., financial sources and instruments that have come from outside the conventional finance system such as regulated banks and capital markets. The sector has valued in recent years at the intersection of the capital market: social media and advanced technologies (Rak- Młynarska, 2017).

Crowdfunding is an online collection of funds that helps organizations or individuals to bring their ideas to reality (Belleflamme et al., 2014). Crowdfunding presents a new source of seed capital for new ventures and has the potential to spur entrepreneurship (Kuppuswammy & Roth, 2016) significantly. Compared to financial institutions, the requirement of crowdfunding does not entail an established track record as a prerequisite to funds transfer (Kappel, 2009). It also offers an option that allows the raising of small capital for entrepreneurs, which can be considered inconsequential to the conventional investment players (Monteiro, 2014).

 

1.3       Objectives of the study

 

1.4       Justification of the study

There is a funding crisis for start-up entrepreneurs, creators of innovative ideas and SMEs in Nigeria, which require a collaborative, proactive solution by all stakeholders if these firms and individuals are to contribute to the economic development of the country continuously. Successive governments at all levels in the country in acknowledgment of the strategic role of these people and institutions have initiated different intervention funding programmes for the continuous growth of the economy, yet there is no observed change in the situation. On the contrary, Funso et al. (2015) argue that availability of funds is no longer the issue but lack of awareness and basic education on the part of operators to access the available sources of funds. No doubt, if these firms and individuals are well funded, they constitute the major employers of labour in the private sector.

The perception about the existing funding gap is attributable to some stringent lending conditions from banks vis-à-vis the inability of traditional fund providers such as business angels, venture capitalists and family, and friends to adequately provide the needed funding and assistance. In emerging African markets, banks are reluctant to extend loans to start-ups for lack of collateral and the associated high risk of default. In Nigeria, a World Bank report suggests that only 14 percent of small to medium-size enterprises, or SME’s, have access to bank loans or overdraft protection. In an attempt to address this problem, promoters of SMEs and Start-up entrepreneurs’efforts to continually bootstrap is not yielding the desired results. The general funding crisis has led to most of these firms and ideas failing within two to three years from the day of opening doors for business or could not see the light of the day; a situation that has led to the inauguration of several commissions inquiring into the possibility of an alternative funding approach to alleviate the fears of prospective entrepreneurs.

Nigeria as a country is known for its internet usage in Africa. Therefore, with a deliberate government policy to encourage entrepreneurs’ in Nigeria, the potentials for crowdfunding are inexhaustible. However, the use and success of crowdfunding bother significantly on the willingness of entrepreneurs to tap from the funding mechanism and the crowd to back/support innovative ideas by making small contributions by way of investment or donations. Therefore, the question this paper seeks to discuss is “what are the crowdfunding potentials in Nigeria?”

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