FIN501

Assignment 2: 4,000 words

1. Introduction
The purpose of this report is to answer the main question: is crowdfunding the best way
to raise funds for beach? The question based on the news reported by BBC News about a
crowdfunding campaign to buy back a private beach for public use from a Wellington-based
businessman. This report, therefore, analysis in the perspective of Social ventures, not in
the perspective of Business ventures. The structure of this report starts with the literature
review about crowdfunding, propose the theoretical framework for choosing the
appropriate crowdfunding model, then makes the decision and outlines the conclusion and
recommendation at the end.
2. Literature Review
In this section, I provide a theoretical discussion of the concept of crowdfunding. First,
we present a concept of crowdfunding. We then describe the crowdfunding process and
crowdfunding platform. Crowdfunding model is described in the last part of this section.
2.1 The Concept of Crowdfunding
- Social ventures, like most business ventures, often face significant challenges in accessing
capital from traditional sources such as bank loans or equity capital due to liabilities of
newness and smallness (Mitra, 2012).
- At the same time, since social ventures focus more on creating social value than on longterm financial returns, so sometimes it is more difficult to attract the financial investors.
(Dees and Anderson, 2003)
- Although social ventures vary in organizational form, both legally and operationally, social ventures seek financing from a variety of sources that include
friends, donations, grants, social investors, earned income and bootstrapping
(Schwienbacher and Larralde, 2010)
- Crowdfunding has emerged as an alternative means to finance social ventures in both the
early phases of start-up and expansion phases of growth (Schwienbacher and Larralde,
2010).
-This phenomenon has stimulated the global growth of crowdfunding.
- Crowdfunding has grown exponentially as a source of financing for entrepreneurial
endeavors and served as an alternative means for entrepreneurial endeavors to fund their
programs and operations that is becoming increasingly popular.
- In 2012 alone, $2.7 billion was raised online via crowdfunding to finance over 1.1 million
campaigns (Carmichael, 2013).
- An estimated $5.1 billion was expected to be raised in 2013 and the growth trend is
forecasted to continue (Clifford, 2013).
- According to the forecasting report by Crowdsourcing.org and the World Bank, it is
expected that crowdfunding will surpass $300 billion in funding transactions by 2025.

- Crowdfunding can be defined as the financing of a project or a venture by a group of

individuals. Funds are typically raised on the internet through relatively small contributions
from a large number of people (Mitra, 2012).
It is based on the fact that people want to help other people and projects they like and that
are close to them, emotionally or geographically. Some people are primarily interested in
investing in projects that share their own values, that are locally engaging, or that create
jobs in their community. Others have a real knowledge of the market a project or company
is addressing and desire to bring funds and expertise to the success of the project, very
similar to business angels and venture capital funds.
- It facilitates the financing process by providing a platform that enables individuals
passionate about an idea or cause to easily invest small amounts of capital and to share the
idea with others.
- Through crowdfunding social ventures motivate individuals to provide
financing to support their initiative (Gerber, Hui and Kuo, 2012).
- Although, each individual in the crowd generally contributes a small sum to a campaign,
the combined financing can be sufficient to help a social venture fund a program or
initiative (Assadi, 2015).
- Social ventures increasingly utilize crowdfunding as one of mechanisms to finance their
programs and operations, and gain legitimacy as it provides an alternative means to attract
individual investors interested more in their social vision and less in their cash-flow than a
traditional investor (Horrocks and Horrocks, 2014).
2.2 Crowdfunding Process
- The process of crowdfunding is in many aspects similar to the financing of any
entrepreneurial endeavor, but everything is done online. Figure 1 summarizes this process.

Social
venture
devlops
campaign

Choose
online
platform to
help
fundraise for
project

Solicit
participation
from funders
or backers
on social
media

Apply money
raised oward
project

Distribute
rewards to
funders of
backers (if
applicable)

Figure 1: Crowdfunding Process

1. The first step in the crowdfunding process is developing a campaign that focuses on an
initiative or need that requires financing.
2. The social venture chooses an online platform to raise these funds, and if applicable
chooses the level and types of rewards for funders or backers.
The rewards can vary from a simple thank you from the social venture founder to a T-Shirt
or product or service produced by the venture (Outlaw, 2013).
3. Once a campaign is launched the social venture must remain active on this platform as
well as on social media to encourage funders or backers to participate.
4. Once the monetary goal at the end of the fundraising period is reached, the social
venture can use the capital raised. However, some platforms like Kickstarter have an

all-or-nothing policy on fundraising goals (Andrei, 2011). This means that if a fundraising
goal is not met, the creator of the project will not be allowed to receive the funds raised and
contributions are given back to backers (https://www.kickstarter.com/help/
faq/kickstarter+basics?ref=footer). If a venture chooses a crowdfunding platform
that offers rewards, once the campaign is finished the venture must distribute
these rewards which can be an addled process.
2.3 Crowdfunding Platforms
- Although crowdfunding websites existed in the early 2000s, the emergence of
online payment platforms really enabled crowdfunding websites to reach their current
levels of popularity (Davies 2013).
- Two of the most popular crowdfunding websites in the United States are Indiegogo and
Kickstarter. These platforms have easy user interface, brand recognition and large audience
reach.
- Users create crowdfunding campaigns, which are then subject to fee
structures for funds raised on the platforms.
- Indiegogo provides campaigns
raising funds for a 501C3 a 25% discount on fees (Indiegogo 2014).
- At the same time, developing a crowdfunding campaign enables an individual or social
venture to gain credibility and legitimacy.
- While Kickstarter and Indiegogo are two of the most popular crowdfunding
websites, their main target market is not social ventures.
- Other platforms like Start Some Good and Causes only promote campaigns with a social
purpose associated with them. For example, one of Start Some Goods core values is to
support change makers who support democracy, equality, transparency, collaboration,
opportunity for all, care for the planet and for each other.
- Creators must submit their idea to the website and wait for approval based upon a series
of question such as, Does the campaign create positive social change? and How much
social impact would this campaign have? (Start Some Good, 2014).
- One main benefit of the site Causes is that it is an ad-supported platform, which
means Causes earns its revenues through sponsorships and ads.
- Therefore, users are not charged a set-up fee or any fees associated with the funds raised
using the Causes platform (https://www.causes.com/help).

2.4 Crowdfunding Models

- The different online crowdfunding platforms generally operate around a rewards,
donation, debt or equity model.
- Thus as part of the crowdfunding process explained above, social ventures must choose
the type of crowdfunding which aligns with their goals.
2.4.1 Reward Crowdfunding Model
- The most popular model of crowdfunding has been the reward model which has grown
significantly in the funding of creative, social, and entrepreneurial projects (Gadja and
Walton, 2013).

- In the rewards model, funders are promised some product or benefit in return as a
rewards for their monetary contributions to the project (Assadi, 2015). For example, the
social venture Krochet Kids sought funding to help develop sustainable incomes for women
knitting hats in an impoverished area of Peru. Depending on the level of financing, backers
were offered rewards such as their name on an inscribed plaque that would be located in
the ventures offices in Peru, a hat, a meeting with the ventures Community Involvement
Director, or a trip to Peru to meet the beneficiaries behind the program (Kickstarter, 2011).
The rewards model provides an incentive for participants to donate at certain levels in
return for a product or benefit of interest.
2.4.2 Donation Crowdfunding Model
- The donation model classifies supporters of projects as philanthropists who do not expect
a direct return for their donations (Assadi, 2015). Many social ventures receive a large
percentage of their financing from donations and crowdfunding provides a mechanism to
interact more with supporters interested in providing suggestions regarding their operations
or products (Schwienbacher and Larralde 2012). Major charities and individuals requesting
donations to their cause use this model. One example of this model is the Scripps Research
Institute campaign on Crowdrise that aims to find a cure for Ebola (Crowdrise, 2014). At the
time of this writing, $100,000 had been donated through this fundraising process to help
this initiative (https://www.crowdrise.com/cureebola). Donation and reward-based
crowdfunding grew 85% to $1.4bn in 2012 and made up over half of the crowdfunding
raised in 2012 (Gadja and Walton, 2013).
2.4.3 Debt Crowdfunding Model
- Another type of crowdfunding that exists but does not offer such a tangible reward is the
debt model. This crowdfunding model tends to be used as a way to fill institutional voids
where traditional financial institutions do not operate and offers alternative financial aid
rather than as a direct way to raise capital (World Bank, 2013). Lending-based crowdfunding grew 111% to $1.2 billion in 2012 (Gadja and Walton, 2013). In the debt model,
individuals lend their money to another individual or group with the expectation they will
receive repayment. Sometimes the money is repaid with interest, but that depends on the
online platform (Outlaw 2013).
This debt model attracts users who may not have access to traditional financial institutions.
Crowdfunding platforms such as Puddle target those who may not qualify for a traditional
bank loan such as Teresa Goines. She started a restaurant in San Francisco, CA, and because
she was denied a traditional bank loan, she turned to crowdfunding and borrowed $5,000
from 41 people, a loan she has since repaid in full (Henna and Hoffman, 2014). For Puddle, a
borrower must sign up using a Facebook account and a United States bank account. They
may then join a puddle where they are expected to contribute some amount of money.
The individual is able to borrow up to five times the amount they have contributed and they
must repay this loan (with a predetermined interest rate typically between 5% 8%) within
3 6 months (Kuzma, 2015). Puddle is marketed toward those who want an easy way to
borrow money, as there are no credit checks and no loan applications. Puddle also creates a
sense of community, as a person is able to contribute to a puddle in which they share an
interest with those seeking to borrow money. Kiva is also a prominent crowdfunding
platform that uses the debt model to help individuals finance micro entrepreneurs
worldwide. As of November 2014, Kiva had made loans totaling over US$639 million to over

1.4 million entrepreneurs through more than 804,000 loans (Kiva, 2013). Kiva finances these
entrepreneurs through their relationships with 288 microfinance institutions (MFIs) in over
84 countries. These MFIs select and vet the individual that are granted a loan and featured
on Kiva. Kiva borrowers primarily have business loans, but some have student, housing, as
well as personal use loans.
2.4.4 Equity Crowdfunding Model
- The least common version of crowdfunding is the equity model (Mollick, 2013). Although
equity-based crowdfunding grew 30% in 2012 to $116 million, it is still very small
considering the total $2.7 billion raised through crowdfunding in 2012 (Gadja and Walton,
2013). In equity-based crowdfunding, investors become shareholders in these ventures in
the hopes of receiving dividends or a return on their initial investment (Schwienbacher and
Larralde, 2010). There are a number of examples of energy and utilities start-ups that use
the equity model of crowdfunding such as the Green Electric Power Group. This start-up
aims to create social, economic and environmental value through renewable methods of
energy consumption and production (Gold, 2010). The equity area of crowdfunding has
been highly regulated up until recently (Schwienbacher and Larralde, 2010). The Jumpstart
Our Business Startups (JOBS) Act of 2012 lifted the general solicitation ban preventing sales
of equity in private companies to accredited investors (Simon and Loten, 2014). The JOBS
Act legalizes some types of equity financing for start-ups and small businesses based on the
amount of crowdfunding sought (Schatz, 2015).

3. Theoretical Framework
- According to the research crown funding: Tapping the right crowd, the characteristic of
crowd investors is different from institutional and professional investor (Belleflamme,
Lambert and Schwienbacher, 2013). It is therefore essential to understand the crown
investors before choosing the crowdfunding model that is best suit to raise financial for a
program or initiative.
- Crowd investors have different mechanisms to assess the initiatives or ventures that they
seek to finance. Most individuals from the crowd are not sophisticated investors and they
avoid evaluating business plans, cash-flow liquidity and collateral (Gerber, Hui and Kuo,
2012). However, as crowdfunding becomes more mainstream, individuals in the crowd are
becoming more selective in their investments and many traditional
investors are utilizing this mechanism to make their investments. In the case of social
ventures, crowdfunding investors are often driven by the purpose and value creation goals
of the social venture.
-Social ventures create different types of economic and social value (Coleman and Kariv,
2015). They generate social value by helping society or the environment. This can come in
the form of facilitating education, health, freedom or helping a disadvantaged group (Dees
and Anderson, 2003). Social ventures also create environmental value by promoting
activities that are green and environmentally friendly like recycling or alternative energy
(Meyskens and Carsrud 2013). This environmental betterment is a type of social value. At
the same time social ventures create economic value both directly and indirectly. Some
social ventures sell products or services for which they receive revenue, thus generating

income to directly help sustain their organization or to pay back investors. This is direct
economic value that is created for the social venture. Social ventures also indirectly create
economic value by supporting clients or beneficiaries in their pursuit of wealth creation
(Dees and Anderson, 2003). For example, an organization might support a micro
entrepreneur who then is able to grow their business and have more income for their
family. This micro entrepreneur might also hire another worker who now has an income.
These are
examples of indirect economic value creation facilitated by the social venture. Social
ventures create varying levels of economic and social value according to their missions,
visions and internal goals. Depending on the respective importance of economic and social
value creation for a social venture, the type of crowdfunding platform might vary. Choosing
the appropriate crowdfunding model is important for a social venture so that they best
focus their efforts to raise financing for a program or initiative.
Economic Value

Social
Value

Low

Low
Reward

High
Equity

High

Donation

Debt

Figure 2: a theoretical framework of crowdfunding model

- Figure 2 shows a theoretical framework of crowdfunding model for choosing the

crowdfunding model that is best suit to raise financial for a program or initiative.
- First, when a social venture creates high social value, but low economic value, a social
venture should choose the donation crowdfunding model.
The donation crowdfunding model attracts investors interested in acting as philanthropists
who do not expect any type of financial return.
These investors are less concerned if a social venture is generating income and are more
interested in the social benefit created by the social venture.
By using this crowdfunding method, social ventures will more likely attract investors who
seek high social value creation and they will not need to reward their social investor in any
way.
- Second, when a social venture creates high social value and high economic value then a
social venture should choose the debt crowdfunding model.
Through debt crowdfunding social investors can help an entrepreneur or individual create
economic value both directly and indirectly.
This entrepreneur often goes on to create economic value by creating jobs or income for
their own venture.
At the same time in some debt crowdfunding models, social investors earn income for
themselves through the interest charged.
Research into Kiva lending has shown that investors prefer to invest in ventures that have
an entrepreneurial orientation (economic value) and that those having a social orientation
have slower repayment (Moss, Neubaum, and Meyskens 2014).

- Third, when a social venture creates low social value and low economic value then
they should choose the reward crowdfunding model.
The reward model provides a means for ventures to market their venture, gain funding,
establish proof of concept and in the process legitimacy.
For individuals in a crowd that have interest in the social cause, but need to be incentivized
in some way since the social venture has low economic and social value, this type of
crowdfunding model is most practical.
However, in the reward model, the social venture must provide a reward which can be
logistically time-consuming to distribute once the campaign is complete.
Social ventures in the start-up phase that are still seeking proof of concept might find this to
be a good option.
- Finally, social ventures with high economic value and low social value should opt for the
equity model of crowdfunding.
Equity investors seek a return on their investments and generally place more emphasis on
economic over social value.
Social ventures must be willing to give up ownership of a piece of their venture.
They must also be legally structured in a way that allows them to sell equity to social
investors.
Thus the equity model is operationally and logistically more cumbersome for a social
venture.
4. Decision
Before making the decision of which Crowdfunding Model is best suit to raise funds for
the beach, it should start with estimating the Social value and Economic value of this
crowdfunding campaign.
1. Social value > High
This crowdfunding campaign can attract the mainstream medias and wide public interest
both in New Zealand and overseas. From the BBC News, there are more than 36,000 people
have supported the campaign and donations continue to flow in. Hence, it can be roughly
estimated that this crowdfunding campaign have High Social value.
2. Economic value > Low
The Economic value of this crowdfunding campaign vary both High and Low because it is
depending on how the campaigners will use this beach in generating the money. However,
in generally, the public beach can generate money just a little. Hence, it can be roughly
estimated that this crowdfunding campaign have Low Economic Value.
It can therefore conclude roughly from the theoretical Framework of Crowdfunding
Model as above that the donation crowdfunding is suitable for raising funds to buy a beach
for public use because this crowdfunding campaign can create high social value but low
economic value.

5. Conclusion and Recommendation

After analyze this case using the theoretical framework, it can roughly conclude that
the donation crowdfunding is suitable for raising funds to buy a beach for public use
because this crowdfunding campaign can create high social value but low economic value.
However, in order to create the feeling of ownership for this beach as well as to
generate the money for spending in beach maintenance and cleanliness in the long-term
period, the campaigner should change the model of crowdfunding from donation
crowdfunding to equity model.
Nevertheless, since they change to equity model, the campaigner need to increase
the Economic Return for the crowd investor such as, sell the souvenir at the beach, selling
the right to sell goods in the beach area, rent out for daylong, and collect the entry fee from
tourists or foreigners.

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