Academic journal article South Asian Journal of Management

Crowdfunding: A Study of Risk Factors*

Academic journal article South Asian Journal of Management

Crowdfunding: A Study of Risk Factors*

Article excerpt

INTRODUCTION

The crowdfunding initiatives market has substantially grown across the world in over the last decade. Being a non-profit organization, the crowdfunding projects range from small artistic endeavors to large mega projects. Crowdfunding platforms have made it easy to build high impact and accessibility to find suitable funding pages on internet. By combining these with social media tools, it provided individuals' and organizations' the channels to reach across the national and international audiences (Sehra, 2015). Despite the geographical distance between the entrepreneur and the fund lender, the funds get raised to a substantial extent (Agarwal, Catalini, and Goldfarb, 2013). Crowdfunding initiatives are classified into four broad categories namely: (a) equity-based; (b) debt/loan-based; (c) reward-based; and (d) donationbased projects. According to Noyes (2014), who quoted the findings of a Massolution report, in 2012, crowdfunding platforms had raised an amount up to $2.7 billion and had successfully funded around a million crowdfunding projects. Financial projections also stated that the volume of funds was expected to rise up to $5.1 billion in 2013. Further, it was also estimated that the crowdfunding market across the world would touch around anywhere between $90 and $96 billion by 2025 (Noyes, 2014). It would mean a couple of times ahead of the world venture capital markets in 2013 (Hagedorn and Pinkwart, 2013). As far as the crowdfunding projects are concerned, the statistics show that during 2008 and 2012, there was a rapid increase in the crowdfunding platforms which reflected 38 per cent increase across the globe. The growth phenomenon shows an increase in successive years as well. The volume of global crowdfunding operating platforms showed remarkable increase from 342 during April, 2012 to 536 in December 2012. Further, in 2014 this number rose from 536 to 771. According to the report, crowd funding platforms raised $16.2 billion in 2014, an increase of 167 per cent over $6.1 billion that was raised in 2013. This shows a tremendous increase in the volume of business crowdfunding has (Hobey, 2015).

In spite of the rapid growth in the online community of creators and supporters who are linked by crowdfunding platforms, research on awareness of potential risks in this new social phenomenon is still unexplored. Very little is known about how fund lenders prepare themselves prior to they taking any investment decisions. There is scanty research about the awareness of fund lenders regarding the crowdfunding websites, potential risks involved therein and the mechanism through which crowdfunding initiatives operate. Moreover, there is a scarcity of information regarding any efforts by the crowdfunding project promoters to make the fund lenders awareness of any implications for the decisions they have made. According to European Union based startup, namely, Europe Crowdfunding Network Survey, it has mentioned critical issues as contributing factors for arriving at decisive factors. These factors are regarded as potential reasons for enhancing the outcomes from the said decisive factors for the ensuring success. Some issues which the survey has highlighted are (i) presently fund lenders lack information, and comprehension about the process and the potentials outcomes; (ii) challenges of being unaware of violations and protections towards intellectual property, legal concerns about occurrences of fraud and consumer rights and additionally; and (iii) issues of governing legal structure and process of uncertain regulatory mechanisms to control the crowdfunding activities. Hence, it is imperative that crowdfunding platforms must create adequate awareness about the potential areas of 'risks', particularly relevant for crowdfunding. Institutionalization of crowdfunding process has started in India with the Consultation paper on crowdfunding by the Securities and Exchange Board of India (SEBI) in June 2014 (SEBI, 2014). …

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