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Archives of Business Review – Vol. 8, No.7
Publication Date: July 25, 2020
DOI: 10.14738/abr.87.8724.
Aladejebi, O. (2020). Crowdfunding: An Emerging Source of Raising Funds In Nigeria. Archives of Business Research, 8(7). 381-404.
Crowdfunding: An Emerging Source of Raising Funds In Nigeria
Olufemi Aladejebi
University of Lagos Business School,
Akoka Lagos Nigeria.
ABSTRACT
Crowdfunding has become a new phenomenon of raising capital for
business. Crowdfunding is prevalent in developed nations, while it is
just getting popular in developing countries. The research method used
for the research was multiple case studies. The purposive sampling
method was used to select the five participants for the research. The
questionnaire contained fifteen questions. Eighteen themes were
generated from the questions. As a result of Social distancing for
protection under COVID 19, questions were sent to the respondents via
the Google form. The thematic analysis result revealed that agricultural
business is the most popular when it comes to crowdfunding. It is an
opportunity for entrepreneurs to raise money from another source,
easier to access funds through crowdfunding. The crowdfunding
approaches used to raise funds by the five participants are loans,
hybrid, reward-based, and royalty-based approaches. Crowdfunding is
an effective funding alternative for entrepreneurs.
Keywords: Crowdfunding, Crowdfunding Platforms, Crowd Sourcing,
Crowd Investing.
INTRODUCTION
In the last few years, crowdfunding has emerged as a source of a channel of funding for startups,
especially in developed countries like the United States of America, the United Kingdom, and
Germany (Tu, Anh & Thu, 2017). The crowdfunding industry has developed mainly in Europe,
Australia, the United States, and Canada, and thus public policies and regulatory instruments have
mostly been created in these countries. In 2015, the distribution of total funding volume worldwide
was markedly uneven: North America raised 49.94% of the total; Asia, 30.6%, Europe, 18.81%,
South America 0.25%, Oceania 0.19% and Africa 0.07% (Leon, & Mora, 2017). Recently,
crowdfunding has become an increasingly viable option for traditional sources of early-stage
capital. The most recent global crowdfunding industry report an estimated crowdfunding volume
in 2015 at $34.4 billion worldwide, increasing from $16.2 billion in 2014 and $6.1 billion in 2013
(Massolution 2015). The sector revealed continued growth in 2016 to a market volume of $35.2
billion in the United States alone, with over 218,000 businesses across the United States raising
funds from online alternative finance channels in 2016 (Ziegler, Reedy, Le, Zhang, Kroszner, &
Garvey, 2017).
Crowdfunding can be defined as the method of taking a project or business that needs investment
and seeking a large group of people to contribute to this investment. This idea has seriously become
popular of recent and, as a result, is now presented as a viable option of funding projects and
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Aladejebi, O. (2020). Crowdfunding: An Emerging Source of Raising Funds In Nigeria. Archives of Business Research, 8(7). 381-404.
businesses (Forbes & Schaefer, 2017). Crowdfunding makes individuals provide a firm with
financial assistance. It takes place through the social network, internet especially, with the
entrepreneur detailing the business activities and objectives in some cases the form of a business
plan and requesting funding under specific terms and conditions (Lucia, 2015). In broad terms,
crowdfunding can take the form of Donations, pre-selling or pre-ordering, Reward or Sponsorship,
lending, and Equity (Hermer, 2011; Mitra, 2012). The definition of crowdfunding is still evolving
and, therefore, open for discussion (Forbes, & Schaefer, 2017). Though reference is made to
crowdfunding as an innovative method of funding, crowdfunding's basic idea is not new. An
example mentioned from time to time on crowdfunding is the Platform for the sculpture of Liberty.
The publisher of the New York's newspaper called the 'World,' Joseph Pulitzer in 1885, requested
the people to contribute financially to the erection of a statue. He then chose to print the names of
the contributors at the back of his newspaper. Within five months, the sum of $102,000 was
realized. 80% of donors were people that contributed less than US$1of the total amount (Harris,
1986). Also, recently in 2008, during the US Presidential campaign, President Barack Obama
campaign team raised about US$750,000,000 through crowdfunding. About half of the
contribution was from people that contributed less than US$200 (Kappel, 2009).
It has been commonly agreed among researchers, that the origin of crowdfunding is the broader
concept of crowdsourcing (Belleflamme, Lambert & Schwienbacher, 2014). Crowdfunding has
been gaining attention since 2007 in theory and practice. Different researchers have investigated
crowdfunding all over the world by revealing new insights in this up and coming research field and
thus creating many views. The crowdfunding market is still growing. Nonetheless, crowdfunding
has not reached its full potential (Gierczak, Bretschneider, Haas, Blohm, & Leimeister, 2015).
Crowdfunding is a form of microfinance that has been around for years; however, the Internet's
emergence has broadened its use (Helmer, 2011). Crowdfunding is represented by a growing
number of internet sites called crowdfunding platforms, devoted to the service (Gedda, Nilsson,
Athen & Soilen, 2016). According to Hussain and Haque, (2017); Mendes-Da-Silva et al., (2016);
Freedman and Nutting, (2014), crowdfunding became important as a result of the 2008 financial
crisis in response to the challenges faced by early-stage enterprises in generating the funds. Since
then, crowdfunding has spread across the developed world and is now attracting considerable
interest in the developing world. Crowdfunding marks a new trend for SMEs and individual
entrepreneurs to find financial resources in an internet-dominated era (Zhao et al., 2017). The
crowdfunding platform kick-starter alone funded 22,252 projects in 2014. (Boudreau, Jeppesen,
Reichstein, & Rullani, 2015). The main reason for an entrepreneur to engage in crowdfunding is to
raise capital, obtain attention, and get feedback. (Giudici et al., 2012). Unlike venture, capital
crowdfunding raised small amounts from a large number of investors instead of a large amount
from a few investors (Gabison, 2015). Crowdfunding communities are built on a framework of trust
that discourages moral hazard through traceability and social engagement (Leon & Mora, 2017).
Crowdfunding is a form of a new way of fundraising that is growing rapidly. Crowdfunding is a
worldwide trend that accounts for significant sums of money and is just in the early stage of
development. The generality of people is coming to terms with the advantages it offers.
Consequently, it has developed to be another capital source for entrepreneurs that need capital for
financing (Andersen & Mauritzen, 2015). Crowdfunding is an inventive and somewhat recent idea
that brings together entrepreneurs and investors via the Internet. This new way allows the
entrepreneurs to receive funds through the Internet by "open invitation" to finance their
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projects/ventures and thus raise the necessary funds by relatively small contributions of a
relatively large number of investors. Crowdfunding is a fast-growing phenomenon seriously in
debate among academicians (Rodriguez-Ricardo, Sicilia & Lopez, 2017). What drives crowdfunding
participation? The influence of personal and social traits. Spanish Journal). Access to finance is an
important topic, particularly among firms in the early stages of growth. Personal funds are not
enough to start a business, and Bank credit is often not always available. The answer to this
challenge may be found in innovative solutions for raising financial resources for business
ventures. These solutions have originated thanks to the rapid development of information
technology. Crowdfunding, i.e., financing through small amounts paid by many individuals, is one
example of these solutions(Rak-Młynarska, 2017).
Crowdfunding research investigated the principles and interactions of donors, backers, or
investors, often equated as the "crowd" with projects initiators, entrepreneurs, artists, or any
individual or organization seeking financial support via platforms (Short, Ketchen, McKenny,
Allison, & Ireland, 2017; Salahaldin, Angerer, Kraus, & Trabelsi, 2018; Niemand, Angerer, Thies,
Kraus, & Hebenstreit, 2018).
As argued by Giudici et al. 2012, Salahaldin, et al. 2018 and Niemand, et al. .2018, crowdfunding
research is in its infancy and has two main characteristics: first, it is its interdisciplinary nature,
because it is a blend of finance, economics, and management, sociology and information systems;
the second, it is being discussed both inside and outside of the traditional academic discussions
and debates about the crowdfunding can be found in scientific and professional articles, popular
books, newspaper articles, and Web portals. The fast progress of crowdfunding has led to more
considerable research attention from researchers (Xu, Zheng, Xu, & Wang, 2016; Macht &
Weatherston, 2014). Interrelated literature comes up fast from different disciplines, majorly from
management, entrepreneurship, economics, and management (Moritz and Block, 2014). After the
growth of crowdfunding platforms, quantitative studies began to emerge as intermediaries, which
provided data on crowdfunding project transactions (Mollick and Kuppuswamy, 2014). Across the
majority of the academic work on crowdfunding success guidelines, the only research method is
quantitative. Song et al., for example, base their research on a "database of 127 consumer
electronics" projects. Finally, "The Determinants of Crowdfunding Success" by Cordova & Dolcib,
2015). concludes "1127 technology projects". This paper will use qualitative methods to find new
conclusions. Crowding funding is gradually gaining ground in Nigeria; no wonder the security and
exchange commission is working towards a guideline to monitor crowdfunding activities in
Nigeria. Currently, the guidelines is at the exposure draft level.
STATEMENT OF PROBLEM
Lending from banks is the most familiar source of external finance for many SMEs and
entrepreneurs, often relying on straight debt to fulfill their startup cash flow and investment need
(Lucia, 2015). Traditional bank finance poses challenges to SMEs and may be ill-suited at specific
stages in the firm life cycle (Lucia, 2015). In recent times, the phenomenon of crowdfunding has
become a popular source of finance for business owners who seek to finance their business ideas
(Mollick, 2013). Crowdfunding allows the entrepreneur to disregard traditional sources of funding
and reach out to the public for funding (Arkrot, Unger & Åhlström, 201 7).
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Aladejebi, O. (2020). Crowdfunding: An Emerging Source of Raising Funds In Nigeria. Archives of Business Research, 8(7). 381-404.
Entrepreneurs mention the 'availability of finance' as the second most pressing problem for small
and medium-sized enterprises (SMEs) (European Commission, 2000; Ipsos, 2013). Startups face
the same financing problems as SMEs ((Moncada-Paternò-Castello, Vezzani, Hervás, & Montresor,
2014) crowdfunding may offer an alternative method of funding for SMEs and startups (Collins &
Pierrakis, 2012) and a stop-gap solution (Collins & Pierrakis, 2012) Crowdfunding bridges the
financing gap between (small) loans from friends, family, and banks and (large) financing from
venture capitalists (Collins & Pierrakis, 2012). In the wake of the worldwide economic crisis,
crowdfunding has become an increasingly significant alternative form of financing (Kuti, &
Madarász, 2014). SMEs have sought new ways to finance their startup without dealing with
traditional sources like banks and investors (Mollick, 2013), making entrepreneurs try new
financing methods such as crowdfunding (Mollick, 2013). This financing issue led to the new
popular crowdfunding movement (Belleflame et al., 2014). Crowdfunding belongs to the
alternative finance sector, i.e., financial sources and instruments that have come from outside the
conventional finance system such as regulated banks and capital markets. The sector has valued in
recent years at the intersection of the capital market: social media and advanced technologies (Rak- Młynarska, 2017).
Crowdfunding is an online collection of funds that helps organizations or individuals to bring their
ideas to reality (Belleflamme et al., 2014). Crowdfunding presents a new source of seed capital for
new ventures and has the potential to spur entrepreneurship (Kuppuswammy & Roth, 2016)
significantly. Compared to financial institutions, the requirement of crowdfunding does not entail
an established track record as a prerequisite to funds transfer (Kappel, 2009). It also offers an
option that allows the raising of small capital for entrepreneurs, which can be considered
inconsequential to the conventional investment players (Monteiro, 2014).
Objectives Of The Study
This study's objectives include: The ascertainment of the level of awareness of crowdfunding in
Nigeria, check whether crowdfunding is used in raising capital in Nigeria, and the extent of
government regulation.
LITERATURE REVIEW
Theoretical Framework
Theory of Trust Transfer
Trust is an essential part of relationships (Art 48). Crowdfunding platforms are based on the
Internet. Both the project initiators and people that will fund rarely meet; therefore, trust
transference is essential. Trust can be broadly defined in ways. One broad definition is based on
the expectation concerning the behaviour of an interaction partner (Gabarino & Johnson, 1999,
Morgan & Hun 1994) while the other broad definition takes into cognizance the psychological state
consisting acceptance of and exposure to vulnerability (Rousseau, Sitkin, Burt & Camerer, 1998;
Mayer, Davis & Schoorman, 1995). Benevolence, integrity, and ability are essential in trust
definition (Urban, Amyx, & Lorenzon, 2009). Crowdfunding depends on the online trust that has
the components of the Internet, hardware, and software. The trust transfer theory conceives that
a consumer's trust (crowd funder's trust) may be transferred from a known target to an unknown
target (Lee & Hong 2019). The widely accepted definition of trust is the one given by Mayer, Davis,
and Schoorman (1995) which is the willingness of a party to be vulnerable to the action of another
party based on the expectation that the other will perform a particular action necessary to the
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trustor, irrespective of the ability to monitor or control that other party. Trust is significant in many
relationships, such as labour–management relationships, buyer-seller relationships, and strategic
alliances, including crowdfunding initiators and funders.
Theory of Swift Trust
Trust is based on personal knowledge of an individual’s past behavior (Lionel, Robert, Alan &
Yu-Ting, 2009). Trust is built over time based on the individual's cognitive assessment of another
person's behaviour (Lionel et al., 2009). High levels of initial trust is called swift trust. Swift trust
is developed before interaction. Swift trust is based on team member characteristics rather than
on their behaviour (McKnight, Cummings, & Chervany, 1998) and (Meyerson, Weick, & Kramer,
1996). An initial swift trust may be perceived as fragile (Meyerson et al., 1996; Lewicki &
Bunker,1996; McKnight et al., 1998). Swift trust is considered a presumptive type of trust where
team players who are yet to build confidence in their colleagues' ability and integrity are required
to put aside uncertainty to accomplish the desired objectives (Germain, & McGuire, 2014).
According to Xu, Feng, Wu, and Zhao, 2007 and Germain, and McGuire, 2014, swift trust is not
interactive on a social level, but it is a precognitive trust based on action
DEFINITION AND CONCEPT OF CROWD FUNDING
The term 'crowdfunding' was introduced by Michael Sullivan, the founder of fundavlog.com, an
online social platform. He has an online social platform that involves simple blog funding features
for listed projects; He defines funds from the "crowd" as the base on which everything else depends
on (Villani, 2013). Crowdfunding is a method of raising external finance from a large number of
people rather than a small group of specialised investors (e.g., venture capitalists, business angels,
and banks) where each person provides a small sum of the funding raised (Lucia, 2015).
Belletlamme et al. (2014) and Mollick (2013) define crowdfunding as the process of collecting
small contributions from a large number of individuals instead of relying on one unit. According to
Collins and Pierrakis (2012), crowdfunding is the "financing project or businesses with small
contributions from a large number."
Crowdfunding is a unique option of raising funds by building on concepts such as micro-financing
and crowdsourcing and is now represented by a growing number of internet sites devoted to the
service (Kuppuswammy, & Roth, 2016). Moon and Hwang Moon and Hwang, (2018) define
crowdfunding as raising small amounts of money collected from the people to finance the
development of goods and services. Crowdfunding is gradually becoming popular as an option for
the traditional form of raising funds, mostly due to the industry's online nature (Gedda, Nilssion,
Sathen, and Soilen, 2016). Decisions on crowdfunding are mainly made via social media platforms
to appraise and raise funds for projects or new businesses (Bruton, Khaul, Siegel, and Wright,
2014). Some of the factors that lead to crowdfunding's success include funders project relevance,
geographical location, easy and continuous access to capital, entrepreneur's proposed business
strategy, and investor's experience (BAM, 2019).
Social financing (crowdfunding) is usually defined as a method of allocating financial resources via
the Internet from the populace towards a particular objective and getting as a reward reciprocal
services which result from the execution of the project (Rak-Młynarska, 2017). Crowdfunding
means gathering a small amount of money from a large number of the populace, namely the
"crowd" in a community or in society to realize a specific project (Demiray, M. & Burnaz, S. 2019).
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Crowdfunding concept originated from the broader approach of crowding in which "crowd" is used
for the sources of creative ideas, feedback, comments, and suggestions for the design and
improvement of innovation products or business processes (Belleflame, Lambert & Shwenbaches,
2014). An up and coming means of financing entails extending calls to the public, generally through
the Internet, to finance projects through monetary contributions, donations, in exchange for a
product pre-ordering, reward, lending, or investment" (European Commission, 2015a). Also,
Mollick (2014) referred to crowdfunding as the efforts made by entrepreneurial individuals and
groups – cultural, social, and for-profit – to fund their ventures by drawing on a relatively high
number of people using the Internet to contribute money without financial intermediaries. Among
the most significant crowdfunded projects to date are Pebble – the first smartwatch – which
received donations of over $10.2m from more than 65,000 supporters (Mollick and Kuppuswamy,
2014), and the video game "Star Citizen," which attracted approximately $72m from 750,000
ordinary fans (Belleflamme et al., 2015).
According to ( European Commissions (2016), Crowdfunding in the EU Capital Markets Union is an
open invitation to the people to raise money for a targeted project. Fundraisers and the crowd
make use of Platforms on internet sites to interact possible. Monies can be pledged and collected
via the Platform." There are many definitions of crowdfunding, but the main components often
include (i) raising money in small amounts (ii) from many to many (iii) using digital technology
(Jenik, Lyman, & Nava, 2017). Crowdfunding is part of the broader universe of financial innovations
enabled by technological advancements (European Commission 2016a). Crowdfunding describes
a mechanism of sourcing for money by asking a number of people or firms via an online platform
or mobile phone (Jenik et al., 2017).
Crowdfunding gives business owners an alternative opportunity to finance their business through
social networks (Buysere et al., 2012). Since the likely financiers are not professional investors,
their demand is less compared to professional investors and financial institutions who will ask for
detailed information (Schwienbacher & Larralde, 2010). Monteiro (2014) and Belleflamme,
Lambert, and Schwienbacher (2013) envisaged that other funding models could be mixed with
crowdfunding. Monteiro (2014) mentioned crowdfunding could be an alternative to complement
capital acquisition rather than replace the orthodox models.
KEY FEATURES OF CROWDFUNDING
Till now, there is no universal definition of crowdfunding. Consequently, after looking at a number
of definitions, a summary and main feature of crowdfunding can be stated as follows:
1. Crowdfunders and backers are people, likely or unlikely to be well-informed investors. They
provide funds for the businesses and give ideas, market information, solutions to develop
products and services and provide feedback.
2. The financial contribution of each crowdfunder is relatively small compared to the total
collected. The more people participate in a project, the more the amount of capital the
project owner will raise, and the more likely that the Crowdfunding campaign will be
successful.
3. The benefits that crowd funders will receive can be rewards, specific rights, and an amount
of money. In the case of donation-based crowdfunding, funders do not require any benefit
and right when they support the project.
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4. Every CF campaign is conducted on crowdfunding platforms through the Internet. The
Internet makes it easier for the funders to obtain information on the project and the project
owner before making a decision. This is also a salient feature of CF compared to other
funding methods because it eliminates geographic constraints between funders worldwide
and the project.
Figure 1
The critical components of a successful campaign are the communication, the Platform, the
characteristics of the campaign itself, and the investment (European Commission, 2013).
Crowdfunding refers to activities wherein donations or investments are collected from the public
via such platforms as social networks to fund various projects, ranging from the production of
cultural or artistic content to the establishment of startups (Carvajal, M.; García-Avilés, & González,
2012). Golić (2014) examined crowdfunding as an alternative means of financing SMEs.
Crowdfunding is a pioneering and somewhat new idea of sourcing funds through the Internet that
links entrepreneurs and investors (Golić, 2014; Fatoki, 2013).
Entrepreneurs can collect funds through the Internet, by way of an open invitation, to finance
business ventures from relatively small offerings of a relatively large number of investors (Golić,
2014). Golić examined the expansive collection of opportunities that crowdfunding provided,
which could benefit the wider socio-political community and the potential crowdfunding
customers like SMEs. SMEs suffered a significant impact of the global financial crisis in 2008 (Golić,
2014). Golić observed that the banks did not provide enough funding under sufficiently and
acceptable terms to finance SMEs in developing countries. The macroeconomic uncertainty in
developing countries did not encourage banks to grant credit to SMEs (Fatoki, 2014; Golić, 2014).
Golić concluded that crowdfunding was an alternative source of financing SMEs more reachable
than the banks and capital markets.
CROWD FUNDING STAKEHOLDERS
Crowdfunding is distinctively made up of three stakeholders: the project initiators who seek
funding for their projects, the backers who are willing to support a specific project, and the
matchmaking crowdfunding platforms acting as intermediaries (Belleflamme et al., 2014).
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Aladejebi, O. (2020). Crowdfunding: An Emerging Source of Raising Funds In Nigeria. Archives of Business Research, 8(7). 381-404.
Figure 2
Crowdfunding mostly happens on crowdfunding platforms (CFPs), i.e., Internet-based platforms
that link fund revisers to funders with the aim of funding a particular campaign by typically many
funders.
(1). A common feature of all Crowdfunding platforms is that participants come to obtain access to
additional funding (Belleflamme, Omrani, & Peitz, 2015). Crowdfunding platforms charge fees for
processing donations (Gerber & Hui, 2013). Crowdfunding platforms provide dedicated project
pages, analytics, and project monitoring and tutorials before and throughout the campaign (Gerber
& Hui, 2013). The majority of crowding funding platforms are found in the USA and Europe
(Gabison, 2015). Crowdfunding platforms are websites that enable managers, entrepreneurs, and
initiators to solicit funding via an open call and post details about the projects. Potential backers
may browse through the projects and support the ones they find attractive by providing funds (Kuti
& Madarász, 2014).
There are three main actors in crowdfunding: (i) the project originator(s) who put forward the
proposal or project to be financed, (ii) people who back the project offered and (iii) a coordinating
firm that provides a platform for communication and brings the groups together (Ordanini, Miceli,
Pizzetti, & Parasuraman, 2011). The project originators range from single individuals to big firms,
but small firms are behind the majority crowdfunding campaigns (Mollick & Kuppuswamy 2014).
Crowdfunding platforms have become very popular in the past few years (Massolution, 2015).
According to The Crowdfunding Industry Report 2015, the largest annual survey on the
crowdfunding industry, the global revenues of the sector grew 167% in 2014, raising US$ 16.2
billion, with 1250 platforms surveyed (Massolution, 2015).
CROWD FUNDING CATEGORIES
Crowdfunding subcategories include donation-based, equity-based, reward-based, royalty-based,
and lending based. They all involve different scopes, motives, and outcomes (Arkrot et al.,2017). A
donation crowdfunding has charity as the intention. The investor does not expect to return on
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investment (Frydrych, Bock, Kinder, & Koeck, 2014). Lending based crowdfunding operates like
the traditional lending where an investor lends an amount to an entrepreneur with the expectation
of a return. The royalty-based crowdfunding gives the investor a percentage rate of the company's
revenue based on its investment (Outlaw, 2013).
Reward-based crowdfunding offers rewards in return for investment, e.g., getting the company's
product at a discounted price before getting to the market (Belleflame et al., 2014).
Equity-based crowdfunding adopts a profit-sharing approach where an investment in the
campaign will be exchanged for shares or individuals of the firm (Brown et al., 2016). Even though
this approach shares the principle of funding through business angels or venture capitalists,
Equity-based crowdfunding turns to a larger chunk of individuals for funding instead of relying on
one unit (Bellflame et al., 2014). Equity financing offers the opportunity for early-stage fundraising
and for bridging the funding gap for young innovative startups. These financial innovations open
the door for startups to obtain funding, even if capital markets are not functioning (Kuti &
Madarász, 2014). Equity-based crowdfunding may lead to being a serious challenge to venture
capitalists and business angels soon (Vulkan, Astebro, & Fernandez, 2015). Equity-based
crowdfunding is a model where investors acquire a stake in the company in the form of a share or
share like agreement (e.g., as profit – sharing) Equity-based crowdfunding entails influenced
significantly by the legal environment of the host country (Bradford, 2012).
Contributors to donation-based crowdfunding campaigns do not receive anything for their
contributions (Gabison, 2015). These types of donations can support any projects. The
contributions can receive tax deductions for their participation depending on the project (Satorius
Pollard, 2010; Schwienbacher & Larralde 2010). Donations continue to be the main basis of raising
funds: a survey of platforms showed that 49% of the $575m raised globally in 2011 came from
donations. Campaigns, 11% of funds went through a reward-based campaign, and 18% went
through an Equity-based campaign (Charman-Anderson; 2012)). The distribution of platforms is
changing. Equity-based crowdfunding entails the issuance of shares through the Internet. Investors
can acquire stock in corporations for a small amount of money, with a claim over the company's
future cash flow (Kuti & Madarász, 2014).
Crowd funding has developed into five types (i) donations (ii) rewards (iii) equity (iv) lending (v)
royalty (Leon & Mora, 2017). The framework of crowdfunding models is grouped into two primary
categories as the non-financial return models and the financial return models, each including two
types (European Commission Report, 2013). These crowdfunding models are donation-based,
reward-based, lending-based, and equity-based, depending on the kind of return offered to
potential funders (Buysere, Gajda, Kleverlaan, and Marom, 2012; Bretschneider, Knaub and Wieck,
2014). Financial Crowdfunding involves an expectation for the crowdfunder to make a financial
return on his investment, i.e., the motivation and incentives to invest are usually financially based.
Three crowdfunding models fall under this definition: Equity, loan, and royalty crowdfunding
(Andersen, & Mauritzen, 2015). Non-financial crowdfunding is the opposite, as there is no direct
possibility for the crowdfunder to make a financial return on her investment. Reward and donation
crowdfunding are examples of non-financial crowdfunding, although the crowd funder's
motivation in each model might differ (Andersen, & Mauritzen, 2015).
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Aladejebi, O. (2020). Crowdfunding: An Emerging Source of Raising Funds In Nigeria. Archives of Business Research, 8(7). 381-404.
Equity crowdfunding
Equity crowdfunding is the act of offering securities to the general public by privately owned
businesses, usually through the Internet. The model allows businesses to provide a proportion of
their Equity for a predetermined price so that anyone can acquire a share in the privately held
company (Pierrakis & Collins, 2013).
Loan crowdfunding
Loan crowdfunding is a financing model where crowdfunders lend money via CFPs (e.g. Lending
Club, Zopa), either directly or indirectly, to potential borrowers. Loan CFPs typically permit both
private persons and businesses to apply for loans.
Reward crowdfunding
Reward crowdfunding offers crowdfunders non-financial benefits in exchange for their pledge
(Ahlers, Cumming, Günther, and Schweizer, 2015). The most common reward crowdfunding model
is essentially a pre-purchasing platform. Before production has begun, future customers are invited
to pre-purchase a product so that the project gets enough funding to be realized. This also provides
intangible benefits to the funders. The incentive to participate in such crowdfunding campaigns is
the crowdfunders' desire for reward and inner motivation (Pierrakis & Collins, 2013).
Donation Crowdfunding
Donation crowdfunding is one of the non-financial models. Crowdfunders typically have intrinsic
motivation to donate, and returns will be intangible benefits from backing the project (Pierrakis &
Collins, 2013). As with all crowdfunding projects, donation projects have a predetermined goal of
how much money they aim to collect.
Royalty crowdfunding
In royalty crowdfunding, the entrepreneur receives funds from crowdfunders in exchange for a
royalty fee or a certain percentage of future sales or profits from the project (Massolution, 2015).
Hybrid Crowdfunding
Hybrid crowdfunding is a combination of different crowdfunding models. There may be benefits
for both entrepreneurs and crowdfunders by using this funding model (De Buysere, Gajda,
Kleverlaan, and Marom, 2012). E.g., if an entrepreneur uses a combination of reward and loan
crowdfunding, the crowd funder's payoff is both financial and non-financial.
Massolution has proposed a classification that differentiates between four crowdfunding types,
respectively (Massolution, 2012):
1. Reward-based crowdfunding, in which backers `primary objective for funding is to gain a
non-financial reward, such as a token of appreciation or in the case of a manufactured
product, a first edition release.
2. Lending-based crowdfunding, in which backers receive fixed periodic income and expect
repayment of the original principal investment.
3. Donation-based crowdfunding, in which backers donate to causes they want to support,
with no expected compensation.
4. Equity-based crowdfunding, in which backers receive compensation in the form of equity- based revenue or profit share arrangements.
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CROWD FUNDING IN NIGERIA
Soreh ( 2017), crowdfunding is a new funding innovation available to entrepreneurs and creators
of innovative ideas to raise money to fund projects for a predetermined reward. The new funding
innovation is yet to penetrate the fabrics of entrepreneurial finance in Nigeria but with
considerable acceptance in the USA, France, Netherlands, Britain, etc. Presently, crowdfunding
campaigns for entrepreneurial activities in Nigeria is still evolving. Hence this study is conceived
to scale the level of awareness and the people's attitude regarding the concept.
The study is exploratory; thus, the method adopted is qualitative, but with a survey instrument
designed for the purpose. Nigeria is said to be a host of about Nine crowdfunding platforms with
several listings on some of the platforms, especially; sites such as Imeela, Naturfund, Funmilowo,
Donate-ng, but there is little or no evidence of successful funding for entrepreneurial activities.
Some successful campaigns recorded for entrepreneurial activities in the country were listed on
the platforms' websites.
BENEFITS OF CROWD FUNDING
Brown et al. (2016) state that the advantages of crowdfunding, apart from raising capital, include
validation of product or business idea and creating a sales pipeline by distributing the products to
backers. A crowdfunding campaign is less time consuming to launch them, turning to traditional
sources of funding and is less constrained by legal aspects (Gerber & Hui, 2013). Crowdfunding
allows creators, people who request resources to appeal for funds directly from supporters, and
give resources through online platforms (Gerber et al., 2012). Crowdfunding makes it possible for
those with limited access to traditional financial backing sources, such as banks or venture
capitalists, to acquire required financial resources to pursue their projects (Gerber, & Hui, 2013).
Crowdfunding also gives people with disposable income a new way to give to others and "invest"
in a project that might not happen without their financial support (Gerber, & Hui, 2013). One of the
significant advantages of crowdfunding is similar to that of social media, enabling initiators to
make personal contacts and communicate with a large number of visitors who are interested in the
future of their project and are emotionally attached to them (Kuti, & Madarász,2014).
It can be used as a promotion device to support mass customisation or used-based innovation or
to understand better consumer preferences (Belleflamme & Lambert, 2014).
Crowdfunding reduces intermediation costs due to more symmetric information and the fixed low
rates associated with making transfers through its platforms (Leon & Mora, 2017). Crowdfunding
is a new concept that offers an alternative funding method that enables entrepreneurs to realize
their original ideas (Demiray, & Burnaz, 2019). According to Jenik, Lyman, & Nava, 2017, the
advantages of using crowdfunding by SMEs include: Provision of financial recourses, the investors
do not need to have special knowledge about the industry, retention of management control over
the company, removal of geographical barriers to investment, valuable signals about the market
potential of the product/project, marketing of products and cost reduction.
The benefits of donation crowdfunding include Community participation and feeling of glow,
voting with money, and support formalization (Jenik et al., 2017). The popularity of crowdfunding
presents one argument for its further consideration in academia. Another critical factor is the new
advantage it offers designers as an alternative form of investment. While crowdfunding carries
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risks, it also can result in significant benefits for the campaigner. By exposing a product to the
public, entrepreneurs can receive an extensive and varied set of feedback.
Furthermore, campaigners can enjoy tremendous positive exposure to potential customers and
future investors. Finally, crowdfunding favors those with innovative ideas as opposed to wealth. A
campaign can be launched with minimal cost, no proof of sales, and no release of Equity in three
models. It is an exciting option available to entrepreneurs (Forbes & Schaefer, 2017).
Crowdfunding enables entrepreneurs to verify their ideas and raise capital to develop innovative
products (Jensen & Özkil, 2018).
DISADVANTAGES/ RISK OF CROWD FUNDING
Risks associated with crowdfunding for investors include:
Fraud: Projects may be schemes to take advantage of investors. Fraud constitutes the biggest threat
to crowdfunding campaigns (Collins & Pierrakis, 2012; Securities and Exchange Commission, 2013;
Ramos, 2014). Incompetent entrepreneurs: projects might be led by Incompetent entrepreneurs
(Collins & Pierrakis, 2012; Securities and Exchange Commission, 2013). Lack of an efficient
secondary market for equity-based crowdfunding. Investors may struggle to price their investment
when they exit if they cannot use market mechanisms for equity-based crowdfunding. The slow
development of a secondary market (105) also slows the growth of the primary market (Collins &
Pierrakis, 2012; Securities and Exchange Commission, 2013). Taxation: Platforms and campaigns
face numerous issues related to tax and donations. Unclear regulations are the fifth risk. Despite
the growing popularity of crowdfunding, a scholarly understanding of the phenomenon is
currently limited (Colombo, Franzoni, & Rossi-Lamastra, 2015). The success rate of crowdfunding
projects on most platforms is less than 50 percent (Massolution, 2015).
According to Jenik, Lyman & Nava, 2017, the most apparent risk donors face is a fraud, either in the
form of fake campaigns or cyber-attack. Crowdfunding remains a topic of hot debate, with
questions raised about whether the broad public should participate in investments characterized
by many as a highly risky and low yielding return and lacking investor protections (Griffin, 2012;
Hazen, 2012; US News and World Report, 2012; Evans, 2015). Regardless of its new-found
popularity, however, statistics show that the vast majority of crowdfunding campaigns
dramatically fail, with 81% of failed campaigns reaching less than 20% of their funding goal
(Forbes, & Schaefer, 2017). There are several ethical concerns in crowdfunding ranging from
exposure to fraudulent campaigns, lack of privacy, and abuse of funds raised (Snyder, Mathers, and
Crooks 2016; Leela, 2016); similarly, Crowdfunding present several opportunities and challenges,
(Burtch, Ghose, and Wattal 2013). Thus, Jones, Coviello, and Tang (2011) argue that there is a need
to have awareness regarding the concept of the inconsistencies and issues affecting its
implementation.
RESEARCH METHODOLOGY
Multiple case study qualitative research method was used for this research. The target participants
for the research are beneficiaries of crowdfunding in Nigeria. A purposive sampling technique was
used to identify potential participants. Yin (2014) suggested using a purposive sampling method
to identify potential participants in multiple case studies. As a result of social distancing as a way
of protection from COVID 19, questionnaires were sent to participants via the Google form. With
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the consent of participants and assurance of confidentiality. Eighteen themes were defined from
the fifteen questions.
RESULTS
Owners/key personnel of five (5) businesses that are beneficiaries of crowdfunding were
interviewed in this case study. Their responses were collated and analysed using thematic analysis.
Individual responses per question were thoroughly scanned, and keywords were highlighted and
defined as codes. Themes were created under each question based on the codes, and these codes
were assigned accordingly. Eighteen (18) themes were identified from the fifteen (15) interview
questions.
Highlighted below are the themes and codes for each interview question. The number of times a
code was featured per respondent is shown in parenthesis where applicable.
Question 1: Tell us about your company and what you offer, and what's your role in the company?
Themes
Industry Products & Services Role of Respondent
Codes:
1. Agriculture & Agribusiness (3)
2. Agro-processing (3)
3. Crowd Funding Platform (1)
4. Manufacturing (1)
Codes:
1. Poultry (3)
2. Export (1)
3. Agro commodities (1)
4. Footwear (1)
5. Financing services (1)
Codes:
1. MD/CEO (4)
2. Head of Communication (1)
Question 2: Is this the first crowdfunding campaign you've been engaged in?
Theme: Crowdfunding Campaign Experience
Codes:
1. First Campaign (2)
2. Second Campaign (2)
3. Third Campaign (1)
Question 3: Did you try to get funding through traditional sources, too, such as Venture Capitalists
and Business Angels or Loans?
Theme: Funding attempts from traditional sources
Codes:
1. Loans (3)
2. Grants (1)
3. Investors (1)
4. Bank of Industry (1)
Question 4: Why did you choose to use crowdfunding?
Theme: Reason for Crowdfunding as Finance Option
Codes:
1. Ease of access
2. Market validation
3. Gaining the confidence of potential investors
4. A better alternative for agribusiness
5. The secured market for products
6. Networking
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Question 5: How did you choose the Platform? And why the Platform in particular?
Theme: Reason for Platform Choice
Codes:
1. Working business models
2. Collective effort
3. Reward-based Crowdfunding
4. Values
5. Working relationship
6. Referral
Question 6: What was your main purpose with your campaign?
Theme: Purpose of Campaign
Codes:
1. Increase production capacity (2)
2. Economy of scales
3. Fund Raising
4. Market validation
5. Networking
Question 7: Have you seen any other benefits with your campaign? Was this something you
predicted?
Theme: Benefits of Campaign
Codes:
1. Growth
2. Recognition
3. Milestone success
4. International media feature
5. Networking
6. Information exchange
Question 8: Which approach did you use, and why? (Equity, Loan, Reward, Donation, Royalty,
Hybrid Crowd Funding)
Theme: Crowdfunding Approach
Codes:
1. Loan (1)
2. Hybrid CrowdFunding (2)
3. Reward-Based (2)
4. Royalty (1)
Question 9: Did you consider other approaches too?
Theme: Consideration of Alternate Approaches
Codes:
1. Positive (4)
2. Negative (1)
Question 10: How did you experience the communication from the crowd community?
Theme: Communication Experience
Codes:
1. Handled by company
2. Stressful
3. Too many people to deal with
4. Good (2)
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Question 11: Did you get any feedback, if yes, what sort of feedback?
Themes
Feedback Feedback Method
Codes:
1. Satisfaction with the
performance of investment
2. Positive feedback
3. Room for improvement
Codes:
1. Periodic
2. Online
Question 12: How did you perceive the number of backers? And how many are they?
Theme: Number of Backers
Codes:
1. Unaware (do not deal directly with backers)
2. 72 backers
3. 5 Backers
Question 13: Would you rather have seen fewer backers with bigger contributions or more backers
with less contributions?
Theme: Preference Regarding Number of backers
Codes:
1. Fewer backers, bigger contributions
2. Indifferent (2)
3. More backers, less contributions
4. More backers with bigger contributions
Question 14: If you would redo your campaign, what would you change?
Theme: Changes: if given the opportunity
Codes:
1. Opt for a profit-sharing model
2. Nothing (3)
3. Better preparation
Question 15: What other information will you like to share about Crowdfunding in Nigeria?
Theme: Crowdfunding in Nigeria (Other information)
Codes:
1. A better option for farmers
2. More accessible than traditional funding means
3. Preferable
4. Limitless possibilities
5. New concept
6. More of foreign backers
7. Need for public enlightenment through media
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Aladejebi, O. (2020). Crowdfunding: An Emerging Source of Raising Funds In Nigeria. Archives of Business Research, 8(7). 381-404.
Crowdfunding Thematic Analysis Table
S/N Themes Codes
1 Industry
1. Agriculture & Agribusiness (3)
2. Agro-processing (3)
3. Crowd Funding Platform (1)
4. Manufacturing (1)
2 Products & Services
1. Poultry (3)
2. Export (1)
3. Agro commodities (1)
4. Footwear (1)
5. Financing services (1
3 Role of Respondent
Codes:
1. MD/CEO (4)
2. Head of Communication (1)
4 Crowd Funding Campaign
Experience
1. First Campaign (2)
2. Second Campaign (2)
3. Third Campaign (1)
5 Funding attempts from
traditional sources
1. Loans (3)
2. Grants (1)
3. Investors (1)
4. Bank of Industry (1)
6 Reason for Crowd Funding as
Finance Option
1. Ease of access
2. Market validation
3. Gaining the confidence of potential investors
4. A better alternative for agribusiness
5. The secured market for products
7. Networking
7 Reason for platform choice
1. Working business models
2. Collective effort
3. Reward-based Crowdfunding
4. Values
5. Working relationship
6. Referral
8 Purpose of the Campaign
1. Increase production capacity (2)
2. Economy of scales
3. Fund Raising
4. Market validation
5. Networking
9 Benefits of campaign
1. Growth
2. Recognition
3. Milestone success
4. International media feature
5. Networking
6. Information exchange
10 Crowdfunding approach
1. Loan (1)
2. Hybrid Crowd Funding (2)
3. Reward-Based (2)
4. Royalty (1)
11 Consideration of Alternate
Approaches
1. Positive (4)
2. Negative (1)
12 Communication experience
1. Handled by company
2. Stressful
3. Too many people to deal with
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4. Good (2)
13 Feedback
1. Satisfaction with the performance of
investment
2. Positive feedback
3. Room for improvement
14 Feedback Method 1. Periodic
2. Online
15 Number of Backers
1. Unaware (do not deal directly with backers)
2. 72 backers
3. 5 Backers
16 Preference Regarding the
number of backers
1. Fewer backers, more significant
contributions
2. Indifferent (2)
3. More backers, less contributions
4. More backers with more significant
contributions
17 Changes (if given the
opportunity)
1. Opt for a profit-sharing model
2. Nothing (3)
3. Better preparation
18 Crowd Funding in Nigeria
1. A better option for farmers
2. More accessible than traditional funding
means
3. Preferable
4. Limitless possibilities
5. New concept
6. More of foreign backers
7. Need for public enlightenment through media
DISCUSSION & CONCLUSION
The thematic analysis results show that agriculture and agribusiness are most popular when it
comes to crowdfunding. Most of the crowdfunding opportunities currently in Nigeria are targeted
towards agribusiness. Also common amongst the agribusinesses as products and services were
poultry. Asides the three agribusinesses, one of the businesses was a crowdfunding platform itself,
and another was a footwear manufacturing company. Four of the respondents were the MD/CEOs
of the businesses, while the fifth respondent was the head of communication.
Regarding crowdfunding campaign experience, two businesses were experiencing their first
campaign; two were experiencing their second campaign while experiencing their third campaign.
Given the low popularity of crowdfunding in Nigeria, it can be said that the business experience, in
this case, a study in terms of crowdfunding was generally average.
All the respondents had tried to get funding through traditional means such as loans (e.g., Bank of
Industry as specified by one of the respondents), grants, and investors. It can be perceived that
crowdfunding was an opportunity presented to the entrepreneurs after attempting other funding
means.
When asked why crowdfunding was a finance option, respondents explained that it was easier to
access funds through crowdfunding. It was highlighted that crowdfunding was a better alternative
for agribusinesses as it creates a secure market for their products. Networking was also mentioned
as a reason for its being a preferred choice.
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Aladejebi, O. (2020). Crowdfunding: An Emerging Source of Raising Funds In Nigeria. Archives of Business Research, 8(7). 381-404.
Reason for choice of individual crowdfunding platforms, as explained by the respondents, were
working business models, good working relationships, core values, reward-based crowdfunding
system, collective effort, and referral.
The purpose of the campaign was mostly to increase business capacity, raise funds, and network.
The tone of the respondents showed that they were benefiting from their crowdfunding campaigns.
Benefits such as business growth, international and local recognition, the achievement of
milestones, networking, and exchange of information amongst fellow entrepreneurs were
mentioned.
Crowdfunding approaches used were loans, hybrid crowdfunding, reward-based crowdfunding,
and royalty. However, four of the five respondents were positive about considering other
approaches.
Regarding communication experience from the crowd community, a respondent explained that the
Platform they use does not give them access to the crowd community, but to the company only,
another respondent explained that communication was stressful as there are too many people to
deal with, while two respondents felt communication was excellent.
Feedback received by the respondents from the crowdfunding community was mostly positive, and
feedback methods featured were periodic feedback and online feedback due to the COVID-19
pandemic.
Only two respondents knew the number of backers, one had 72 backers, while the other had five
backers. Preference regarding the number of backers varied amongst the respondents. While two
respondents were indifferent, one of them had the opinion that it was better to have fewer backers
and bigger contributions, another preferred more backers and less contributions while another
wanted more backers with bigger contributions. If given the opportunity to redo campaigns, a
respondent explained that they would instead opt for a profit-sharing model("I would campaign
for a profit-sharing model rather than one in which the companies determine our much profits I
earn"). Another respondent stated that they would prepare better while the rest would change
nothing.
Other information on crowdfunding in Nigeria, as highlighted by the respondents, showed that
crowdfunding is a better funding option for farmers. It is more accessible, would give rise to
limitless possibilities in the Nigerian economy, and is still new to Nigerians as there are more
foreign backers. The need to enlighten the public about crowdfunding opportunities was also
highlighted.Although crowdfunding seemed to be tilted towards agriculture as seen in this case
study, platforms are beginning to embrace other industries such as real estate, transportation, and
the health sector, as explained by one of the respondents representing a crowdfunding platform.
In conclusion, this study's findings show crowdfunding is an effective funding alternative for
entrepreneurs, especially agribusinesses.
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