Crowdfunding for Sustainability: A new vehicle for green growth?

crowd

Text by Kristian Roed Nielsen, PhD and Misum Postdoc researcher

The emergence of reward-based crowdfunding as novel source of funding for entrepreneurs (also labelled innovation finance) has been hailed as a democratizing revolution within innovation finance (Lawton and Marom 2012; Mollick and Robb 2016). The potential to engage consumers directly for capital is proposed to be changing “how, why, and which ideas are brought into existence” (Gerber and Hui 2013:1) by, for example, reducing the geographical constraints of traditional funding (Agrawal, Catalini, and Goldfarb 2015) in addition to expanding access to entrepreneurial finance to a greater range of individuals and teams (Lehner and Nicholls 2014; Sorenson et al. 2016). Its potential for enabling sustainable entrepreneurship is therefore also gaining popular and academic traction. But is this hype or does reward-based crowdfunding truly represent a needed innovation funding boon for sustainable entrepreneurs? This is exactly what my dissertation sought to explore by examining under which conditions and to what extent reward-based crowdfunding could financially benefit entrepreneurs with social and/or environmentally-oriented products. And can it? Well it depends.

The dissertation finds that while consumers represent a significant and growing source of innovation finance this does not necessarily translate into more sustainable finance[1]. Instead, funding success for sustainable entrepreneurs depends on the purpose of their endeavor (i.e. social or environmental); the amount of financing sought; entrepreneurs’ geographic location, social capital, network and prior experience; and – in no small part – the product [offered].  The fact that innovation finance can now be driven by consumers rather than professional investors does not in itself change consumer demands; demands which more often than not fail to correlate well with sustainable behavior. Instead reward-based crowdfunding appears for certain types of campaigns as an enabler of sustainable product innovation, while in other circumstances it enables egocentrically-oriented campaigns.

The factors that influence funding success for sustainable entrepreneurs are five-fold. Firstly, while consumers are on aggregate more likely to support socially-oriented ventures – as compared egocentrically-oriented campaigns – environmentally-oriented campaigns often perform worse than their egocentric counter-parts. Secondly, entrepreneurs should consider how much funding they are seeking as in reward-based setting as entrepreneurs who seek more than 8,000 US$ (€7,400) will on average find it increasingly more difficult to garner funding. Thirdly, location still matters even with crowdfunding context and entrepreneurs located in an urban setting with a high median income and social capital will find it significantly easier to garner funding. Fourthly, an entrepreneur’s personal network in addition to past experience with crowdfunding strongly influences the likelihood of funding success. Prior success with crowdfunding resulting 173% increase in expected funding, while failure results in a 17,7 % decrease. Finally, the products on offer themselves strongly influence individual pledging behavior both in terms of sustainable and unsustainable pledging, but also in terms of whether social or environmental orientation garners support. Hence when we look at a more detailed picture of the products themselves individuals seem motivated by different things when pledging. Specifically there is some indication that for fashion items, electronics and other “wearables” consumers pledge for egocentric reasons (i.e. style, make and color), while for other more out-of-sight items social (i.e. fair wages) and environmental (i.e. recycled materials) values win the day.

Hence while reward-based crowdfunding is not a silver bullet often espoused by its proponents for tackling the funding concerns of sustainable entrepreneurs “the crowd” does hold a significant potential that thus far remains largely untapped. It is this untapped potential that hope to unravel with my work at Misum.

If you want to read the none-condensed version of my dissertation you can find it here.

Text by Kristian Roed Nielsen, PhD and Misum Postdoc researcher

Follow Kristian on Twitter: @RoedNielsen

[1] Sustainable finance referring to capital that is invested in entrepreneurs or ventures who pursues a good, service, or process system that offers an improved or the same economic performance with lesser externalities in the form of social and environmental hazards (Bos-Brouwers 2010; Halme and Laurila 2009).

References
Agrawal, Ajay, Christian Catalini, and Avi Goldfarb. 2015. “Crowdfunding: Geography, Social Networks, and the Timing of Investment Decisions.” Journal of Economics & Management Strategy 24(2):253–74. Retrieved (http://dx.doi.org/10.1111/jems.12093).

Bos-Brouwers, Hilke Elke Jacke. 2010. “Corporate Sustainability and Innovation in SMEs: Evidence of Themes and Activities in Practice.” Business Strategy and the Environment 19(7):417–35. Retrieved (http://dx.doi.org/10.1002/bse.652).
Gerber, Elizabeth M. and Julie Hui. 2013. “Crowdfunding : Motivations and Deterrents for Participation.” ACM Transactions on Computer-Human Interaction 20(6):34–32.
Halme, Minna and Juha Laurila. 2009. “Philanthropy, Integration or Innovation? Exploring the Financial and Societal Outcomes of Different Types  of Corporate Responsibility.” Journal of Business Ethics 84(3):325–39. Retrieved (http://dx.doi.org/10.1007/s10551-008-9712-5).
Lawton, Kevin and Dan Marom. 2012. The Crowdfunding Revolution: How to Raise Venture Capital Using Social Media. New York: McGraw Hill Professional.
Lehner, Othmar M. and Alex Nicholls. 2014. “Social Finance and Crowdfunding for Social Enterprises: A Public-Private Case Study Providing Legitimacy and Leverage.” Venture Capital 16(3):271–86. Retrieved (10.1080/13691066.2014.925305).
Mollick, Ethan and Alicia Robb. 2016. “Democratizing Innovation and Capital Access: The Role of Crowdfunding.” California management review 58(2):72–87.
Sorenson, Olav, Valentina Assenova, Guan-Cheng Li, Jason Boada, and Lee Fleming. 2016. “Expand Innovation Finance via Crowdfunding.” Science 354(6319):1526 LP-1528. Retrieved (http://science.sciencemag.org/content/354/6319/1526.abstract).

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