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Crowdfunding for Entrepreneurs- analysis of the Institutional Work


Academic year: 2023

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Institutional work by crowdfunding actors was studied at a macro level by analyzing crowdfunding offerings. The use of crowdfunding by entrepreneurs to raise funds has led to a proliferation of alternative forms of entrepreneurial financing. One of the reasons for the increased importance of crowdfunding in recent years is the steady decline in the number of Angel investors since the financial crisis in 2008 (Tomczak & Brem, 2013).

The emergence of the new institutional form of crowdfunding was a result of the institutional entrepreneurship of some of the earliest crowdfunding platforms in the world such as Kickstarter, Indiegogo in the US and Crowdcube in the UK. The institutional work carried out by the various actors such as the regulatory authorities, important crowdfunding platforms, which have become institutional managers and the entrepreneurs in general, will reduce the uncertainty of investors and promote the growth of crowdfunding. There are studies that have investigated the factors that contribute to the successful financing of crowdfunding projects (Greenberg, Pardo, Hariharan, & Gerber, 2013; Ahlers, Cumming, Gunther, & Schweizer, 2015).

The studies investigating the success of crowdfunding projects will be more relevant if the maintenance of this new institutional form is ensured. Since there are not many studies that look at this aspect despite its importance, we try to examine the institutional work done at the micro level by a crowdfunding platform called Indiegogo from United States for studying the institutional work done on micro level is done to maintain the institution. of crowdfunding. Crowdfunding has emerged simultaneously in a number of developed economies (Freedman & . Nutting, 2015). The development of crowdfunding platforms accelerated after the global financial crisis when traditional financing for both cultural and commercial enterprises dried up (Bruton, Siegel and Wright, 2015) ).

Geographical scope: The most important feature of crowdfunding is that the investors are geographically dispersed and the average distance between.

Figure 2: Global heat map of crowdfunding in the developing countries
Figure 2: Global heat map of crowdfunding in the developing countries

Types of crowdfunding

Monetary benefits such as equity or profit share are offered by platforms such as Sellaband and Wefunder. Crowdfunding platforms like Prosper and Zopa offer peer-to-peer lending services where investors get their principal back along with a set interest rate. Almost all crowdfunding platforms have projects that offer non-monetary rewards, such as offering products to the investor before they are launched on the market.

There are platforms like Justgiving and Spot.us where people invest without expecting any kind of reward (Burtch, et al. 2012; Smith, et al. 2012). Debt-based: Otherwise known as online peer-to-peer loans, investors in this crowdfunding model receive a debt instrument that pays a fixed interest rate and repays the principle after a certain period of time. All-or-nothing (AON): In this crowdfunding model, the entrepreneurial company will have a capital raising objective, i.e.

If he fails to achieve this goal, the entrepreneur will not be allowed to keep any of the pledged funds and. Keep-It-All (KIA): In this model the entrepreneur can keep the fund albeit at a higher fee, regardless of whether the capital growth goal is achieved.

Benefits of crowdfunding as a source of seed capital

The wider geographical coverage and the expanded pool of potential investors reduce companies' financing problems. Given the fact that crowdfunders take the opinion of other crowdfunders into consideration (Van Wingerden and Ryan, 2011), it is highly likely that the advertisement will facilitate further fundraising from other crowdfunders or financial intermediaries. The popularity of the crowdfunding project, in turn, will serve as a high-quality market research for the company.

A project's failure to raise funds can be seen as a sign to improve the idea. Crowdfunding also provides an opportunity to retain ownership and control when projects are funded through grants, awards, or debt-based crowdfunding models. Even in equity-based models, investors will invest very small amounts and will only be small shareholders with very little control over the business.

Since crowdfunders are not sophisticated investors, they seldom engage in scientific valuation of the companies and hence the time and cost of entrepreneurs to provide detailed contractual information is saved.

Process of financing startups through crowdfunding

Crowdfunding platforms also show funding status, ie. the amount the project has raised to date and the number of funding days remaining. The nature of crowdfunding removes some of the friction in funding startups and small businesses. Institutional theory explains how organizations and groups secure legitimacy by following the rules and norms of the institutional environment (Bruton, Ahlstrom, & Li, 2010).

The emergence of the new institutional form of crowdfunding was an outcome of the institutional entrepreneurship of some of the earliest crowdfunding platforms in the world. The institutional entrepreneurs together with the members of the organizational field such as government, professional and trade associations (Wooten and Hoffman, 2016) engage in purposeful action known as institutional work to create, maintain and disrupt institutions (Lawrence and Suddaby 2006). To understand the institutional work done by crowdfunding platforms, the study analyzed the statements of the owners of the crowdfunding platforms or chief executives, which informed their intentions to act and decisions to act in a particular way.

The regulatory data related to crowdfunding platforms and regulatory features is obtained from the Crowdfunding 2015 Survey Response Report published by The Board of the International Organization of Securities Commission. The statements made by the owner or chief official of the crowdfunding platforms and reported in the news articles were analyzed and categorized under different types of institutional work. The study examines the actions of the regulatory authorities of different countries to see which regulatory provisions help sustain crowdfunding in their countries.

Provisions in various regulations were examined to identify those that provide for monitoring the actions of crowdfunding platforms to ensure compliance with the rules. New organizations imitate the performance of successful organizations and eventually become embedded as informal norms that help maintain the institutional form. These are actions that give signals to the public in the form of positive and negative examples that indicate the intended norms of institutions.

Mythologizing involves consciously recounting the actions that were performed in the past as a signal to convey the meaning attached to that action and that it was aligned with the intended norms of the institution. This paper examines how the regulatory bodies and the crowdfunding platform as actors in the organizational field of crowdfunding try to maintain this new institutional form by indulging. The study found that the enabling institutional work that includes the rules that promote and support the crowdfunding phenomena is smaller compared to the institutional work that is done to constrain the organizations' actions.

In order to protect the interests of investors, the supervisory work should be improved, the result of which is the establishment of rules to control the operation of crowdfunding platforms and entrepreneurs. The platform has tried to propagate some norms that a crowdfunding platform should follow, which will help in achieving the legitimacy of crowdfunding. Full institutionalization will provide the institution with ad hoc stability and will only occur when the rules and norms established through the institutional work of the actors are dispersed.

Adopting rules and norms frequently will help spread the rules and norms.


Figure 2: Global heat map of crowdfunding in the developing countries


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