Why Crowdfunding?

Being an entrepreneur is not an easy task, and raising capital for your project can be particularly difficult. According to Younkin and Kuppuswamy (2016), a significant hurdle to launching your world changing idea is access to seed capital or early-stage funding. Many will find it quite difficult to raise funds from traditional channels, such as banks and angel investors. The solution? More and more individuals have turned towards crowdfunding platforms for early-stage capital. And it seems the industry is growing stronger than ever before with an annual growth rate of 17% (Business Wire, 2018). In 2016, transactions on reward-based crowdfunding platforms alone were valued at three billion USD and is expected to hit 8.4 billion USD in 2020 (Statista, n.d.).

It should be noted that there are 4 types of crowdfunding (Nibusinessinfo, n.d.):

• Reward crowdfunding; involves the return of non-financial benefits
• Debt crowdfunding; involves receiving financial interest on one’s investment
• Equity crowdfunding; involves receiving shares
• Donation crowdfunding; involves donating to a project

While equity-based crowdfunding presents a far more accessible alternative for entrepreneurs compared to angel investors or venture capital funds, the same cannot be said for regular investors. As equity-based crowdfunding involves the distribution of securities, it is subject to many regulatory constraints which prevent most individuals from investing on these platforms. Fortunately, in May 2016, the U.S. Securities and Exchange Commission (SEC) enforced Title III of the JOBS Act, which essentially permitted the 97% of US residents to invest in startups (Republic, n.d.). However, the convoluting legal requirements are not approachable to most founders and new investors.

About Republic

So what is Republic? According to its website, Republic (n.d.) is an equity-based and SEC licensed crowdfunding platform that aims “to democratise investing and level out the fundraising landscape for founders and investors alike”. It was founded in 2016 shortly after the JOBS Act was enacted. Furthermore, it is part of a group of startup platforms, which includes two household names from the online startup ecosystem: AngelList and Product Hunt. In fact, the former played an essential role in legislating the JOBS Act and several Republic founders are its alumni.

One of the platform’s main objective is to facilitate accessibility to early-stage investment for ordinary folks such as you and me. However, Republic also focuses on another vital issue in the startup community that I have not yet mentioned: minority founder discrimination. According to Younkin and Kuppuswamy (2016), there’s an underrepresentation of minorities among funded ventures. The researchers initially explain this observation with biases towards minority founders from resource providers. By examining thousands of Kickstarter projects and carrying out several experimental tests, they eventually discover that unconscious bias is the main form discrimination driving this outcome.

It is particularly important to mention that while crowdfunding does not eliminate discrimination towards minority founders, the platform does indeed allow for means to address this issue. Republic (n.d.) has recognised this potential and are consequently using their crowdfunding platform to promote minority founders. However, they are not only focusing on minorities, but on other marginalised groups in the startup world. For instance, this includes women, veterans, the LGBT community and immigrants as well.

Their Success

So how exactly does Republic promote these marginalised groups on their platform? As you can see in Image 1 below, projects may be labelled with tags, informing investors about the nature of the project as well as the type of founders running it, ranging from “Minority Founders” and “Immigrant Founders” to “Female Founders”. Similarly, investors can filter through projects based on these tags. However, apart from these features, you won’t encounter any particular differences compared to alternative crowdfunding platforms.

Given these simple measure and the platform’s overt support for marginalised founders, one might nonetheless be skeptical about the effectiveness of their actions. However, a report by Republic (2018) revealed otherwise. Image 2 and 3 below illustrates some of their achievements. For instance, 25% of all investments on the Republic platform have gone towards companies with founders of colour, which is far above the national average for traditional VCs. Similarly, the same can be observed for women where 44% of funded projects on Republic included female founders as compared to 13% with traditional VCs.

However, they not only managed to close these gaps of underrepresentation for founders, but for investors alike. As they allow anyone to invest with as little as 10$ on their platform, Republic managed to gather funds for projects from women 30% of the time. This is a significant improvement compared to regular VC firms and even Angel Investors (Republic, 2018).

It might not come as a surprise to you that such a success has attracted a lot of attention from startups. Nonetheless, according to Christopher (2018), companies need to go through a thorough vetting process to comply with US regulations that aim to protect these newfound investors. Out of 3000 companies that had applied to the platform by October 2018, only a handful managed to get onto the platform. However, once on it, founders are able to enjoy a slew of benefits, such as ongoing support, advice and mentorship, including access to Republic’s extensive network of traditional VC.

The Future Ahead

However, according to Greenberg (2018), there is still much room for improvement. At the time of this writing, current US regulations limit crowdfunding to $1 million. More often than not, this is not sufficient to entirely fund a startup. As a result, founders are required to raise money from several other sources, not only from Republic. Consequently, this may pose a problem to marginalised founders who will undoubtedly re-encounter the same problems they tried to avoid in the first place. Caroline Hofmann, the COO of Republic, mentions that if this limit could be raised to 5$ million, crowdfunding platforms such as Republic could potentially act as a sole source of funding, thus allowing founders to completely pivot away from traditional fundraising institutions.

References

Business Wire (2018). Global Crowdfunding Market 2018-2022 | Social Media as a Source of Cost-free Promotion to Boost Demand | Technavio. Retrieved from: https://www.businesswire.com/news/home/20181203005889/en/Global-Crowdfunding-Market-2018-2022-Social-Media-Source

Christopher, E. (2018). Survey Shows Founders Ignored by VCs Are Succeeding With Equity Crowdfunding. Entrepreneur Europe. Retrieved from: https://www.entrepreneur.com/article/321438

Greenberg, A. (2018). Equity Crowdfunding Is Changing The Landscape For Underrepresented Founders. Forbes. Retrieved from: https://www.forbes.com/sites/amandagreenberg/2018/05/18/equity-crowdfunding-is-changing-the-funding-landscape-for-underrepresented-founders/#e4428b77fbaf

Nibusinessinfo (n.d.). Crowdfunding: Types of Crowdfunding. Retrieved from: https://www.nibusinessinfo.co.uk/content/types-crowdfunding

Republic (n.d.). About. Retrieved from: https://republic.co/about

Republic (2018). Republic Report – The business of diversity. Retrieved from: https://republic.co/blog/the-business-of-diversity

Statista (n.d.). Crowdfunding. Retrieved from: https://www.statista.com/outlook/335/100/crowdfunding/worldwide#market-revenue

Younkin, P., & Kuppuswamy, V. (2016). Is the Crowd Colorblind? Founder race and performance in crowdfunding. Academy of Management Proceedings, 2016(1), 11665. doi:10.5465/ambpp.2016.11665abstract

A Brief Talk about Crowdfunding

Recently, crowdfunding has become one of the most well-known methods for a business owner to get his or her project funded through public contribution. Although, like any other fundraising methods, there are positive and negative sides to crowdfunding. The advantages and disadvantages of using crowdfunding platforms can be divided in two perspectives: firm-level and contributor-level (Tsekouras, 2019).

From a firm’s perspective, utilising crowdfunding platforms can be attractive for several reasons. Crowdfunding enables companies to collect funding in a short period of time. The companies can also tap into a larger pool of potential contributors. The community features offered by crowdfunding platforms (either through social media or its own social networks) help founders with constructive feedbacks for projects and online word of mouth. The tradeoff, though, would be the element of transparency that can disclose not only information about the company, but also personal information about the project creators (through social media). There is also the risk of damaged reputation should the project not meet the public’s expectations.

From a contributor’s perspective, crowdfunding platforms allow people access to exclusive products that better match their tastes more. The community aspect of the system also gives potential contributors a “place to belong”; enabling them to provide feedbacks and improve the projects. However, there are risks for an individual to support projects through crowdfunding. There have been cases of fraud in the past (Rio, 2017). There is also the risk of underperformance by the companies that do not deliver within the expected time frame.

The Minority Problem

Taking a closer look into the matter, with the intention to dig deeper regarding the potential of crowdfunding platforms, Younkin and Kuppuswamy (2016) conducted a research given the fact that there are problems of underrepresentation of minority founders in venture investment markets. This situation is relevant, knowing there is indeed discrimination in entrepreneurship against minorities. There are many examples of this. A research by Freeland and Keister (2014) mentioned that it is more difficult for minority founders to receive credit and another research conducted in 2011 saw that minorities must pay higher interest rates (Pope & Sydnor, 2011). Younkin and Kuppuswamy, relating the problem to several prior studies, explain the possible involvement of several types of discrimination as to why discrimination is prevalent even in the business sector:

1.       Statistical Discrimination: People devalue minorities because they expect that they are less likely to complete projects.

2.       Taste-based Discrimination: Preference to support or reject people of certain races/ethnicities, even if it is not economically efficient to do so.

3.       Implicit Bias Theory: Discrimination is described as subconscious acts reflecting cultural beliefs.

The research then recognises crowdfunding as a possible solution for this minority-founder problem. Crowdfunding, in this case, has several roles: (1) an alternate solution when traditional financial institutions show bias, (2) shifts the focus of funding decision away to the broader population, and (3) facilitates projects that are overlooked by “traditional” experts but valued by the wider population. However, to directly see the impact of crowdfunding on minority founders, Younkin and Kuppuswamy tested whether reward-based crowdfunding platforms like Kickstarter really improve the performance of projects run by black founders. They also attempt to identify which forms of discrimination are involved and ways to mitigate these biases.

Methodology & Results

In their study, the Younkin and Kuppuswamy (2016) combined an analysis of crowdfunding projects with an experimental design. In the former, they had collected a sample 7,617 Kickstarter projects launched between January 2012 and March 2014. Results of their statistical analysis showed that black founders were less likely to succeed as they received both fewer and smaller contributions. Moreover, black founders were not less capable in delivering their project than nonblack counterparts, thus suggesting that discrimination was present.

Subsequently, three experimental tests were conducted to identify the types of discrimination at play for which participants were recruited through Amazon’s Mechanical Turk Service. In the first one, the researchers tested for both types of conscious discrimination by asking participants questions about an example project and its founder. Moreover, subjects were randomly placed into one of four possible conditions with differing salience of founder race. Image 1 illustrates what participants saw during the test. After analysing their data, the researchers found that taste-based bias was driving discrimination.

The goal of the second experimental test was to distinguish between unconscious and conscious bias. This was done by testing whether funders altered their perception of project quality between white and black founder using project quality signals such as “Staff Pick”. Similarly to last time, participants were randomly placed into various conditions with differing degrees of quality signals. Results showed that discrimination was unconscious (i.e. implicit bias), thus invalidating taste-based bias as a driver of discrimination.

In the final experiment, the researchers wanted to test the efficacy of 3 intervention methods in mitigating bias. In particular, they looked at (Younkin and Kuppuswamy, 2016):

• Debiasing Intervention; involves counteracting stereotypes about how a group acts
• Group Success Intervention; involves counteracting stereotypes about how a group performs
• Whitewashing Intervention; involves eliminating any indication of race

The usefulness of each method was once again tested by placing subjects into 9 different conditions. Ultimately, the results of this test reveal that both group success and whitewashing are effective at mitigating discrimination towards black founders.

Strengths

The main strength of this study is its pioneering efforts of studying which forms of discrimination are responsible for the underrepresentation of minorities in entrepreneurship. In particular, the subjective evaluation of investment risk and the capabilities of a founder make it rather difficult to study entrepreneurial settings. As a result, researchers turned towards audit or correspondence studies to assess biases. However, the authors tackled this issue by developing a novel research approach that involves the combination of observational and experimental data.

Managerial Implications

While crowdfunding does not by itself mitigate biases towards black founders, the study lists three methods to mitigate discrimination on the platform (Younkin and Kuppuswamy, 2016). The first two are examples of group success intervention, while the final one is an example of whitewashing intervention. First of all, the authors recommend displaying overt support, such as “Staff Pick”, towards African-American founders. They also advocate showing a list of successful founders on the platform, which includes black founder. Last but not least, they recommend reducing visibility of race on the crowdfunding platform’s project pages.

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References

Freeland, R. E., & Keister, L. A. (2014). How Does Race and Ethnicity Affect Persistence in Immature Ventures? Journal of Small Business Management, 54(1), 210-228. doi:10.1111/jsbm.12138

Pope, D. G., & Sydnor, J. R. (2011). Implementing Anti-Discrimination Policies in Statistical Profiling Models. American Economic Journal: Economic Policy, 3(3), 206-231. doi:10.1257/pol.3.3.206

Rio, C. (2017, April 10). 6 Stupid Crowdfunding Scams That Should Have Been Obvious. Retrieved February 27, 2019, from http://www.cracked.com/blog/6-incredibly-obvious-crowdfunding-scams-people-fell-for/

Tsekouras, D. (2019). CCDC.

Younkin, P., & Kuppuswamy, V. (2016). Is the Crowd Colorblind? Founder race and performance in crowdfunding. Academy of Management Proceedings, 2016(1), 11665. doi:10.5465/ambpp.2016.11665abstract