Crowdfunding is an innovative channel to raise funds for enterprises. Literally funded from the crowd, it allows a company to make an open call to a community in order to collect the funds needed to develop an innovation.
Undoubtedly, the main strength of the instrument are the ability to facilitate access to credit, but also, above all, the ability to support the launch of disruptive innovations. Beyond the equity model which allows non-professional investors to acquire stake of start up, the reward-based model represents a real innovative tool to launch, test and sell a new product on the market.
Reward based crowdfunding involves individuals contributing comparatively small amounts of money to projects in return for some kind of reward. The size of the reward is usually a reflection of the amount contributed, so rewards can range form something simple such as a thank-you postcard to a production version of the crowdfunded product.
In the reward model, it is possible to require financial support from the crowds for the development of a product or service that can be sold in the campaign at a lower selling price than the future launch. So, entrepreneurs can raise money, while at the same time introducing their idea to a large market at very little cost, which is a benefit that is not present in any other form of funding.
This model includes a multiplicity of goals that can be simultaneously achieved:
- Market Risk: Crowdfunding mechanism is based on attracting a broad audience, which deciding to contribute financially to the campaign, act as certificator of the real ability of the product to fit the market. Therefore, launching a crowdfunding campaign allows at the same time to raise financial resources and test the feasability and commerciability of an innovative idea, testing in advance the real appreciation of consumer for a new product or service, and so decreasing the market risk associated to the launch.
- Demand and cluster Analysis: In the context of the crowdfunding campaign, entrepreneur will be able to carry out a preliminary analysis of the customers really interested to the product. The pre-order mechanism captures and defines potential customers, as well as allows to make improvement to some commercial and marketing strategies thanks to feedback from supporters.
- Effective Price Discrimination: The pre-order scheme allows entrepreneur to implement an effective price discrimination among crowdfunders which express strong appreciation for the innovation (and therefore decide to pre-order it) and those who intend anyway support the campaign but are not interested or fully convinced about the product. Therefore, during the campaign, entrepreneurs can split crowdfunders on the basis of their willingness to pay.
These characteristics are fundamental to the ecosystem of businesses. The large companies can, through the crowd, first test innovative ideas and pathways, using valuable feedback provided by the crowd and greatly reducing the phases (and related costs) related to the launch of an innovative product on the market.
However, the range of benefits is broad also for small and medium-sized business. The latter usually exhibit lack of funds and a limited impact in the market due to their dimension or the novelty of their business model. With the support of the crowd, emerging companies will be able to directly validated their innovative solution and subsequently increasing the attractiveness of professional investors to involve in the growth phases.
Small and medium sized organizations can increase their efficency in capture value on the market, acquiring visibility and engaging new markets and costumers' target.