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“The Impact of Internet Crowdfunding Model on the Performance of Small and Medium-Sized Enterprises (SMEs) in Shanghai, China”

Chapter 1: Introduction

1.1 Background of the Study

Startups and small and medium businesses are an integral part of the Chinese economy. Their number has been increasing tremendously in the past few years. For instance, in Shanghai alone, the number of registered small and medium businesses had reached 363,600 by the end of the year 2006. This accounted for a total of 99.7% of all the registered enterprises in Shanghai. Irrespective of their importance to Shanghai and overall Chinese economy, there has always been financing challenges for their growth and maintenance. These businesses have always depended on traditional sources of funding which include household wealth, credit cards, grants, venture capitalists, and bank loans (Stemler, 2013). However, startups and small and medium businesses are turning to an emerging source of funding known as “Crowdfunding.”

Crowdfunding is the process by which public members, that is the retail savers not the institutional and professional investors, lend money or invest to business, organizations and households directly and not through an institution. Different crowdfunding platforms make it easier to achieve these investments which are done for any social, material and financial reward. There are three types of crowdfunding which include equity, reward and peer-to-peer crowdfunding. Equity crowdfunding is where lenders invest in early stage businesses and buy some shares. A closely related type of crowdfunding is the profit- sharing crowdfunding; in this case the borrower is required to repay the loan depending on the revenue or profit gained by the firm. The lender and borrower enter into a legal agreement regarding the repayment taking profit into consideration. In reward-based crowdfunding, the individual investor receives some prizes for investment. The rewards are in form of discounts while purchasing a particular product, vouchers or invitation when launching a product in order to gain more experience. The last type of crowdfunding is peer-to-peer (P2P); in this method the investors lend money directly to the businesses.

1.1 Crowdfunding in China

As an alternative to the traditional forms of finance, crowdfunding has taken centre stage in this digital era. Crowdfunding is soliciting small amounts of funding from many people through the internet. According to a 2016 China Internet Crowdfunding and Wealth Management Industry Report, crowdfunding refers to the model that the different sponsors of a given project release their creative ideas on the Internet platforms with an aim of raising funds and in return the project manager offers the investors equities, services, or even material objects. In China, the main types of crowdfunding include rewards-based crowdfunding, donation-based crowdfunding, and equity-based crowdfunding. The Chinese crowdfunding industry has grown in a span of less than ten years. In the year 2011, the first crowdfunding platform in China was established. Five years later in the year 2016 Chen, Wang & Yuan (2016) reported that there were close to 415 crowdfunding platforms in China. The number is 100 more than the previous year 2015. Firms are beginning to embrace the fact that crowdsourcing is also an alternative and reliable source of finance. Among the 415 platforms, 42% of them are occupied by the Commercial Administration and Industrial with the total registered capital lying within RMB 10 and RMB 50 million. These finances are raised through the different types of platforms including rewards-based crowdfunding, donation-based crowdfunding, and equity-based crowdfunding. In the year 2014, a total of RMB2.82 billion was raised. A year later (year 2015), there was an upsurge of 305.1% and the amount raised was RMB11.424 billion. The total amount raised through crowdfunding in China in 2016 stood at RMB11.801 billion.

In the Asia-Pacific region, China has the biggest economy (Yijun, 2018). As such, research indicates that crowdfunding has significantly played an active role in the building of the economy by raising funds that small businesses need to develop into a large business firm. Although crowdfunding was introduced later in China than it was in Europe, it is experiencing rapid growth with platforms built for this purpose mushrooming all over China throughout the year. The increase is directly due to the technological advancements in the country and the active use of the internet by the Chinese people. According to Xiao (2016), the development of crowdfunding in recent days has grown rapidly transforming into some form of network that a business can use to prosper. He continues to assert that despite its reliability as a source of financial aid; there are risks that a firm needs to take to succeed in crowdfunding. For instance, the success of crowdfunding is a significant result of the technological advancements in modern days. The massive number of internet user’s results to the creation of this wealth to different firms. Xiao insists that crowdfunding is the modern way of firms acquiring resources and it’s a suitable substitute to other finance agencies such as banks, trusts and governments loans.

According to Zhu and Zhou (2016), crowdfunding is a way that firms can rely on in the quest to find solutions to their problems. In many cases, firms get new ideas from their users on the best ways to improve and get out of a potential crisis. Crowdfunding depends on online users to create financial resources required for the firm. For example, small firms experience difficulties in trying to mobilize funds from banks, and governments and crowdfunding provides a platform for small business to raise funds through the internet. Crowdfunding is an alternative source of financial solutions to most impenetrable markets in China and the whole world at large (Huang et al. 2018). The research views the crowdfunding as a risk-sharing platform that has significant benefits to a firm through the different application forms. The article site crowdfunding as the most dynamic innovation in the smart investments plans and has the potential to evolve more in the next few years. Several platforms have been created specifically to try and improve on the current platforms and also to find alternative forms of crowdfunding applicable to improve on the already existent ones (Huang et al. 2018).

There are six platforms related to crowdfunding for Small and Medium Enterprises (Koch & Siering, 2015). They include; General purpose platforms for example kickstarter which display a wide range of projects for the potential investors, Niche crowdfunding platforms (CFPs); these platforms are beneficial since they build a community with same interests and can come together to fund a particular industry , cause or purpose. Regional CFPs, they mainly concentrate on getting support from a specified region or community. The White Label CFPs in most case are for the entrepreneurs with an interest of having their own sites with a developed technological infrastructure and have the ability purchase operating licenses. Finally a WordPress blog plugins crowdfunding platform for instance PayPal, are platforms which allows crowdfunding pages to be included in an existing blog for recognition based on its followers and in return receive payments. The platforms are based on the crowdfunding two common crowdfunding methods; First, All or Nothing where the money may be retained in the business or returned to the investor based on whether the goals set have being achieved. Second, partial funding method where in this case all the money from the investors is retained whether the goals was achieved or not.

1.2 Problem Statement

Being a first time entrepreneur, be it a startup or small business, it is beyond any doubt that getting funds can be a difficult task. This is the case in small and medium-size enterprises. A firm might experience difficulties or even end up failing to secure funds due to lack of relationships with venture capitalists, lack of sound financial track record, and lack of relationships with banks. However, with the emergence of crowdfunding, entrepreneurs have a chance of acquiring funds without relying on the traditional fiancé options. The following research explores that growth and impact of the Internet Crowdfunding Model on Startups and Small and Medium Businesses in Shanghai, China.

1.3 Research objective

This section presents both general and specific objectives of the research.

1.3.1 General Objective

The general objective of the research is to determine the growth and impact of the internet crowdfunding model of the performance of small and medium-size enterprises in Shanghai, China.

1.3.2 Specific Objectives

To determine whether there is relationship between the funding impact of crowdfunding and the performance of Startups and Small and Medium Businesses in Shanghai.
To determine whether there is relationship between product validation impact of crowdfunding and the performance of Startups and Small and Medium Businesses in Shanghai.
To determine whether there is relationship between market validation impact of crowdfunding and the performance of Startups and Small and Medium Businesses in Shanghai.
To determine whether there is relationship between branding impact of crowdfunding and the performance of Startups and Small and Medium Businesses in Shanghai.
To determine whether there is relationship between social capital impact of crowdfunding and the performance of Startups and Small and Medium Businesses in Shanghai.

1.4 Research Questions

How does funding through the internet crowdfunding affect the performance of Startups and Small and Medium Businesses in Shanghai?
How does product validation and market validation through the internet crowdfunding affect the performance of Startups and Small and Medium Businesses in Shanghai?
How does branding through the internet crowdfunding affect the performance of Startups and Small and Medium Businesses in Shanghai?
How does social capital raised through the internet crowdfunding affect the performance of Startups and Small and Medium Businesses in Shanghai?

1.5 Significance of the study

This study offers an in-depth understanding of the impact of the internet crowdfunding and how it influences the performance of startups and small and medium businesses. It also shows the need to shift from the traditional financing options that are in most cases limited due to poor relationship with venture capitalists or even poor credit rating. The study also encourages more research in the field of internet crowdfunding and creates awareness of the benefits of crowdfunding as a modern method of financing compared to traditional methods of financing.

1.6 Research Framework

Chapter 2: Literature Review

2.1 Introduction

This chapter reviews the work of earlier researchers regarding the research problem which is the impact of internet crowdfunding model on startups and small and medium businesses. The chapter represents the definition of internet crowdfunding, its origin, and the different crowdfunding initiatives present in China. Further, the chapter provides a theoretical framework regarding the impact of internet crowdfunding and a conceptual framework that shows the relationship between the independent variables and dependent variables being explored in this research.

2.2 Crowdfunding

According to Hollas (2013), is the process through which a venture or a project is funded through raising small bits of money from a large group of people especially through the internet. Since the year 2011, the popularity of crowdfunding technique has shot up significantly with Massolution, which is a crowdsourcing consulting firm reporting 81% growth in the year 2012 alone (Hollas, 2013). According to Khan, Zhao, Akram, Hashim, and Kaleem (2017), the term crowdfunding came from another closely related term ‘crowdsourcing’ which means acquiring feedback, ideas, and solutions from a large group of people ‘crowd’ to develop corporate activities. Therefore, ‘crowdfunding’ is the mechanism through which large and geographically diverse audiences are tapped for small sums of money for the purposes of funding a venture or a project. Howe (2006) argues that crowdsourcing is precedent to crowdfunding. The only difference between them being that crowdfunding promotes capital as another production factor as opposed to only labor as it is the case in crowdsourcing.

Finally, Mollick (2014) defines crowdfunding as a means through which companies fund their projects by the use of the Internet by obtaining relatively petite money from a outsized number of persons other than using usual financial intermediaries. In crowdfunding, people interact in open calls online where standards of financial intermediary do not exist. Through the direct interactions potential lenders are able to see the level of other project backers.it is therefore correct to say that social information promotes the success of a crowdfunded project (Kuppuswamy & Bayus, 2017).

Ford (2016) in his article argues that if you are not using crowdfunding to either launch or validate your product you are missing out on millions of customers and also millions of dollars of risk-free revenue. This is true to both established and upcoming businesses. According to a 2015 report by Massolution, crowdfunding accounted for over 34.4 billion dollars. Typically, a company should tap into a huge market place that has a promising future and win over potential customers at a small cost. New product should be validated through customer feedback. Crowdfunding campaigns are less expensive and can therefore be used to conduct market research and in the process the viability of the product.

Bjurling, Hansson Ehrs, and Ekstam (2017) argues that other than financing, crowdfunding can be used to calculate the needs of consumers as it allows the firm to receive consumer input that is valuable to the company at the time of creation, development, and launching of products which in turn assist in the creation of products that consumers prefer. The authors found out that there is a higher chance of crowdfunding increasing the awareness of the brand. This is as a result of crowdfunding campaigns which have a higher chance of influencing the perception of the consumers regarding a given brand image. Furthermore successful initiatives to display the demand of a proposed product attract long-term investors thus leading to increased future financing for crowdfunders.

2.3 The Growth of Crowdfunding

Members of the public lending money or investing directly to businesses are not a new concept rather it has been there for quite some time now. For instance, the early UK Building Society was established based on similar principles as crowdfunding, the Rotating Savings and Credit Associations have also been existed for a long duration. Nonetheless, crowdfunding has rapidly grown over the last decade due to a number of reasons. First, lack of capital, this is as a result of businesses being unable to access loans from the banks at affordable rates (Collins et al, 2013). This has paved way to the crowdfunding industry especially peer-to-peer type where a basis of creditworthy businesses is provided to the borrower. Financial crisis is the most essential factor leading to the growth of the sector. Second, withdrawal from relationship lending through credit scoring, long-term restructure of banking and closure of some branches has lowered the access bank finances thus increasing the crowdfunding procedures. Finally, low interest rates have offered support to the growth of crowdfunding, especially the P2P sector as the investors and retail savers try to find better gains. Crowdfunding has grown their share in the business finance market through the extensive use of social networks and web-based financial transactions (Collins et al, 2013), less product( with a large number majoring on single products) and the lack of branch network which lead to low overhead costs thus the presence of competitive advantage ( Moldow,2014).

Crowdfunding has amazingly increased over the past few years and is expected to significantly change the provision of service through modifying delivery and underwriting in two methods. First, crowdfunding allow the public to decide on the business or organisation to be invested upon. Therefore it democratises the financial support the business is to receive and this is a deviation from the custom where intellectuals make the funding decisions in arts and economic development. Second, the inherent effectiveness of scaling up using the online platforms as compared to offices and branches is another essential cause for the transfiguration nature of crowdfunding. Unavailable branch networks, support and online back-office, outsourced gatherings, automations of origins and leaner operations has contributed to the cost advantage of 425 basis points over banks as estimated in the US P2P lending sector ( Moldow, 2014).

China is precedent in reward-based crowdfunding since most of the users participate as buyers as opposed to investors. This is in contrast to UK where most users are investors and thus equity-based crowdfunding is leading. However, equity-based crowdfunding is still paving its way in china (Blace & Grubisic, 2017). The major issue affecting the development equity-based crowdfunding in China is the rigorous separation of public and private offerings. Public offerings are quite massive. However, crowdfunding is able conquer the supervisory arena associate to it by motivating private offerings to the public through the internet. Transfer of equity to non-specified persons has raised the security issues among the public and thus must be approved by the state administration. The approval standards in involving the issue of public insecurities are very strict and Small and Medium Enterprises (SMEs) and Start-up businesses are mostly unsuitable for the approval. Another issue is the recognition of the non-specified investor. However, crowdfunding besiege this through the prior registration and approval of the investor by the platform.

In December 2014, China for the first time produced specific regulations for crowdfunding following the two issues mentioned above. They achieved this through publication of the Consultation Draft known as ‘Measures for the Administration of Private Equity Crowdfunding’ which lowered the requirement for investors. In July 2015, the Central Bank in China and other related government departments released some guidelines to regulate crowdfunding. China from then has continually has developed commission to supervise and regulate crowdfunding (Talib & Yew, 2017).

2.4 Influence of crowdfunding on innovation

Scholz (2015) conducted a research to find out how crowdfunding affects entrepreneurs ideas on innovation. Based on the research three main factors contributed to excellent innovations on product development. First; regular updates to backers. Continuous updates to the backers on product information promote ideas and feedback from them which serve a great purpose on the innovations made. Moreover, it presents an easier way to show off accomplishments. Increased updates result to more ideas and feedbacks which in return lead to suitable innovations since they are based on ideas and feedbacks form potential customers or investors. Second; early adoption to crowdfunding in the enterprises, the SMEs that adopt crowdfunding at the initial stages of product development are likely to focus more on getting information from the backers in order to come up with excellent innovations for their products in the future. This is in contrast with those who pursue crowdfunding in the final stages of product development (Michael & Stanco, 2016). Third; openness to new idea is another factor. Through openness to new ideas, entrepreneur gains the interest of investigation the backer’s ideas to come up with innovations. Openness and number of backers not only promotes innovation product development but it also affects its eventual performance in the market. Therefore entrepreneurs only focusing on the on the financial impact of crowdfunding is improvident.

2.5 Shortcomings and Threats of Crowdfunding on SMEs

Through the power of Internet platforms, crowdfunding gives SMEs an opportunity to connect to a wider range of investors, venture new products, and projects. They can also contribute to economic development through the beneficial impacts of crowdfunding for example, cultivating economic innovation and development and creating of employment. Moreover crowdfunding also reveals unique ways of raising capital not prune to competition by other ways through which SMEs can introduce new products to the customers. In addition to the many benefits that SMEs derive from crowdfunding, there exist some drawbacks too. Valenciene & Jegeleviciute (2013) identified four shortcomings that affect the performance of SMEs and startup businesses. First, crowdfunding leads to increased accounting and administrative difficulties. These result from donations and reward-based crowdfunding. However, through equity model the issues are moderated. Second, entrepreneurs’ lack of sufficient knowledge to deal with issues like stolen ideas or models affects the business greatly. As a result the market performance of their products declines signifying less profits and also poor brand promotion. Third; weakening of regulations in regard to crowd funding has resulted to less rigorous specifications for public disclosures. As a result businesses may be created illegally or post false information about on their financial status (Yeoh, 2014). Increased potential of fraud discourages investors to take part in small or startup businesses. Finally, increased level of uncertainty makes it difficult for the entrepreneurs and the backers to choose the most legit platform.

Moreover there exist some threats which affect the prevalence of crowdfunding in SMEs. SMEs are small in nature and there are associated with failure and risk in most cases (Mollick, 2014). This will pull away the investors. Another threat to impacting on their performance is the legal restrictions available for example regulations regarding equity based crowdfunding. However crowdfunding presents some opportunities for growth to the SMEs.

2.6 Crowdfunding for sustainability

Research is still being conducted to identify how crowdfunding contributes to sustainability initiatives in SMEs. Sakamoto & Nakajima (2013) come up with micro- crowdfunding method to help in achieving sustainability in the society. This method was aimed at motivation people in creating a sustainable society and also contributes in maintaining the sustainability. The method impacted some benefits to SMEs and startup businesses. SME play a major role in the world’s economy and have a great impact on environmental footprint thus incorporating sustainability in their strategies is essential. Their nature of flexibility gains them competitive advantage compared to larger enterprises. This is because they are able to integrate sustainability in their development strategies. However the research showed that, most SMEs do not include sustainability in their strategies due to; less awareness on the importance of sustainability in the business, lack of knowledge and information on environmental issues and finally lack of support and guidance, inadequate support services to guide the on the implementation and inadequate capacity to collect and analyze information involving sustainability.

2.7 Crowdfunding on Community Building

Crowdfunding involves the process of constructing a community which will evenly make the decision of investing in their project. Once the public fund a project it’s a signal that they want to be identified with it. Therefore crowdfunding is aimed at achieving this by carrying out crowdfunding campaigns to; increase people’s awareness of the projects and the activities involved, influence people to like the project and want identification with it and final make them to invest or make pledges (Grier, 2013). Crowdfunding participation by the community relies upon the cost (likely to contribute if the cost is low) and the connection that the entrepreneur has with the public. In most case more investors will take part if they know the business or are familiar with the entrepreneur.

2.8 Significance of social capital to crowdfunding

Individual social capital is a strong predictor of success into an emerging enterprise. Social capital as defined by a number of studies is an incorporeal resource at both individual and collective level (Hauser, Tappeiner, & Walde, 2007). At the individual level, it is connected to the personal formal and informal origins while in collective level it is an environmental feature which promotes mobilizing of funds. Agrawal et.al, (2010) argues that projects from initiators in crowdfunding are mainly funded by supported by the people in near geographical areas and thus localized social capital have a significant influence on profitability of crowdfunding. Most studies show that localized social capital make small firms susceptible to developing new products, expanding their markets internationally and also have the ability to make radical innovations. Therefore social capital is a key determinant enhancing economic transactions and overwhelming the shortcoming toward acquiring information to finance new projects. In addition social capital is used is an evaluation by potential investors to signify the quality level.

2.9 Motivations of Companies for Crowdfunding

According to Belleﬂamme et al. (2013), there are three significant reasons for opting on crowdfunding as a source of finance for your venture or projects. All of the equivocators began that gathering finances was the primary reason for utilising crowdfunding. Other intentions mentioned were raising the public’s attention and gather feedback for their goods or services. Gerber et al. (2012) arrive to near similar conclusions. They performed half-structured interviews with market partakers and identified several groups of stimulations: forming relationships, ﬁnancing and self-affirmation, replication of success stories, and networks and increased awareness of the commodity.

According to Hemer et al. (2011), crowdfunding gives the capacity to get funding in the primary stages of a firm’s life cycle and thus a chance to wrap the primary-stage gap. Further targets for crowdfunding that were present were the flexibility and speed of funding, testing the commodities on offer in a market, few traditional responsibilities, escalating effects, positive indicating effects and the utilization of the “wisdom of the crowd” for various firm activities (Macht & Weatherston, 2014).

In modern days, firms have embarked using their buyers’ knowledge for company objectives (Kleemann, Voß, & Rieder, 2008). Crowdfunding now provides consumers with them a probability to adopt the position of investors (Ordanini, Miceli, Pizzetti, & Parasuraman, 2011). Entrepreneurs who are ready to invest are mostly those who have faith in the prosperity of the firm, and its goods or services. The company is legalised by the market (Martin, 2012) if crowdfunding records success and at the same period, it assists in creating a consumer base. Burtch et al. (2013a) conﬁrms with functional information that crowdfunding steers to add visibility and higher commodity consumption. Mollick and Kuppuswamy (2014) crowdfunding is larger than a usual ﬁnancing tactic for firms because it promotes better access to consumers, increased press coverage, and huge interest from potential workers and outside funders.

According to Belleflamme et al. (2010), crowdfunding gives firms a chance to exploit market potential quite effectively. He indicates in a theoretical model as reward-based crowdfunding (pre-ordering) gives way for price discriminations. Firms experience difficulty in identifying consumers who are ready to meet a premium for a commodity that is prior available. In their research they explained that, high utility customers are the ones likely to pre-order the product at higher amount as compared to later customers who wait for the product in the market at a lower charge. These consumers can be identiﬁed via crowdfunding, which gives way to companies to remove the market for such incentives. They analyzed that crowdfunding is more profitable as seen through profit sharing with high initial capital requirements in contrast to the initial capital requirement being relatively low. Afterwards, Belleﬂamme et al. (2013) enlarged their model to incorporate decision issues for firms to select between crowdfunding as a profit-sharing model or a pre-ordering model.

2.10 Motivation of Investors to Crowdfunding

For entrepreneurs to benefit from crow funding, investors must exist to provide the funds. In respect to this, recent studies have been conducted in china on why investors make decisions to support particular initiatives of crowdfunders. According to the research conducted by Harms (2007) there are more benefits to crowdfunding other self-expression and enjoyment. He explains the economic value seen in their contribution, the certainty effect (tangible result of the funded project) and personal utility (benefits of the outcome from the project to customer’s individual needs) motivate the public to invest. Both intrinsic and extrinsic motivation also contributes to investor’s decision. Intrinsic motivation implicates innovations or improvement of a current situation whereas extrinsic motivation is as a result of the financial reward that the investors receive (Van Wingerden & Ryan, 2011).

In earlier cases enterprises only received funds from local investors due to the distance which could affect, monitoring the progress, gathering of information and provision of input. However availability of crowdfunding excludes all distance related challenges making it possible for a wide range of investors to participate (Agrawal, Catalini, & Goldferb, 2014)

2.11 Determining Factors for Successful Crowdfunding

Firms or projects with a non-profit oriented background have a significant possibility of acquiring crowdfunding. This relationship has been ascertained both through theoretical and empirical (Belleﬂamme et al., 2013). Capital providers are fundamentally motivated in the completion of the full project. Belleﬂamme et al. (2013) further states that social organisations have high credibility in realising this expectation, as compared to profit-oriented organisations. Hence and Lehner (2013) proposes that crowdfunding and non-profit entrepreneurship should create harmony.

Mollick (2014) analysed information from the platform Kickstarter and discovered that the chances of a successful crowdfunding transaction reduce as the financing amount and time increases. The magnitude of the fund’s seeker’s social network, the availability of a commodity video and geographical nearness to fund providers adds the potential of successful funding (Mollick, 2014).

By these outcomes, Mollick and Kuppuswamy (2014) discover that successful fund seekers had more Facebook friends (as a proxy for the social network), appropriate backgrounds and outside endorsements. Geographical nearness was also analysed by Agrawal et al. (2011). The authors discovered that while investigating the stored information from the music platform SellaBand that in financed projects, the average gap between the capital providers and the musicians was 3,000 miles. However, at the beginning of raising funds, the bigger proximity between the two parties was evident. Agrawal et al. (2011) breaks down these results as a family and friends effect. The positive impact of geographic nearness on financing success was also present in P2P lending markets (Burtch et al., 2013). However, this home effect bias could in no way be explained by a family and friends effect. Cultural and emotional factors such as a healthy choice for local goods and services seemed to be in control (Burtch et al., 2013).

Investors overall customer satisfaction, delivery timeliness and degree to which the award meets the specified description of crowdfunding in the open call are the measures to successful implementation crowdfunding (Mollick, 2014). Delivering the reward timely to investor affects their participation in crowdfunding. Therefore timely delivery of the reward is viewed as executing quality services. Moreover overall satisfaction of the investors can be achieved if the award meets the specifications at a higher degree.

2.12 Risks in Crowdfunding

Crowdfunding have been proved as an effective way of acquiring capital and enhance validation and promotion of the company. However, crowdfunding also carries some risks that are borne by either the business entity or the lending public. Other risks affect both parties inclusively. These risks include credit risks, fraud risks and market risks.

Credit risks are the risks that both the business and the lender bear while conducting the loan transactions. Belleflamme, Omrani, and Peitz (2015) lamented that although cases of credit default are minimal in small scale crowdfunding, they increase with the increasing complexity and size of the crowdfunding. Some businesses may genuinely conduct a crowdfunding to help enhance its operations or start business operations. However, do to other factors that were not considered, businesses may fail rendering the business bankrupt. Although some regulations demand payment of the credit in such situations, in most of the case, the lenders incur losses.

Although most of business people are genuine while requesting for funding from the public, others are fraudsters aiming at soliciting funding for businesses that do not exist. Abrams (2017) stated that in almost all crowdfunding platforms, there are fraudsters who open accounts and use fake business description for funding. Although most of platforms demand verification of the businesses before they activate an account, some of the fraudsters still find a way of using real businesses but with different ownership details. Although fraudsters pose risks to potential creditors, they also pose risks to real business entities that are later served with lawsuits for defaulting payments Abrams (2017).

According to Turan (2015), crowdfunding includes high cases of prediction and estimation which may be far from the reality. While engaging in equity crowdfunding, an investor buys a stake from company with an estimated venture value. For a startup company, it may be difficult to arrive at a close estimate of the future venture of the business. Further, companies with poor records find it extremely difficult to arrive at a close estimate of the venture. Stakeholders investing in this business will be at risk of making less profit if the market does not favor the companies they have invested in. Additionally, market risks do not only affect the investor but also affect the entrepreneur. According to Mollick (2014), while selecting the right platform to acquire funding in, the investor may be misguided by the offers provided and make some mistakes that may lead to poor placing in the platforms website. A poor placing decrease the entrepreneur’s visibility and may not hit their financial target. Further, since investors are increasingly becoming cautious of the businesses they invest in, Turan (2014) human errors may cause a company to miss their target in equity crowdfunding websites. Mollick (2014) reported that a single spelling mistake in the name and description of the business may cost a business up to 13% of possible funding they would have received through equity crowdfunding platform.

2.13 Role of Government in Crowdfunding

Crowdfunding creates a financial relationship between businesses and the public. Although these relationships may be of goodwill and honest transactions, they pose a risk to either the public or the business entities. In many jurisdictions, the government plays a significant role in harmonizing businesses and the public. Similarly, although crowdfunding does not involve the government as part of the transaction parties, it creates a need for government involvement to regulate the business relationships (Bernstein, 2015).

According to Hooghiemstra and De Buysere (2016), although the government may not regulate the involvement of public in business entities, it may limit some factors that collectively support crowdfunding. In Europe, for example, authorities at both the country level and the European level do not directly limit crowdfunding, as it may be done in small geographic areas. However, the governments have some regulations set in place to heavily limit the promotion of offers and campaigns to large jurisdictions that could reach to a wider range of potential investors. Further, Röthler, and Wenzlaff (2011) stated that crowdfunding mainly involves distribution of loans and credits. Although the European governments have made it possible to conduct a crowdfunding across the nations in Europe, there is a need to regulate the amount and means of borrowing among between businesses and the public. Although it may be difficult to regulate credits in small scale crowdfunding, large scale crowdfunding is mainly regulated by high taxation. Further, taxation is not only imposed on borrowed money, but also on stock given to the business in form of crowdfunding grant from the public

Bradford (2018) discussed the role of the government in regulating crowdfunding through registration. Mainly, both the national and federal governments use registration as a method of regulating crowdfunding. According to Bradford (2018), sale of securities is considered as a very risky and highly profitable business in the United States. Sometimes, crowdfunding may involve sale of business securities under equity crowdfunding. This triggers federal governments to classify such businesses as public limited companies that require expensive registration fees. For businesses with small offerings, the regulation hinders them from selling their securities to the public. Secondly, some of the crowdfunding facilitators use websites to enhance fast transactions and easy reach to their customers. Under security acts adopted by the federal governments, the websites may be treated as investment advisers or as brokers. Just like public limited companies, brokers and investment advisers are registered differently and pay larger taxes. The high taxation and registration costs prevent small businesses from using crowdfunding to raise capital (Cumming & Johan, 2013).

Lin (2017) discussed the role of government in risk management in crowdfunding. Small scale crowdfunding carries minimal risks as the number of people involved is small. Similarly, the number of funds raised in small scale crowdfunding may be small. However, in large scale crowdfunding, the number of investors and the amount raised is significantly large. Such may create risks of lack of honesty between the parties. Some con people may pose as potential business people and steal from honest investors. Further, some investors may decide to cut their relationship with the business at inconvenient times. To avoid such risks, the government has some regulations that help to minimize some of these risks (Lin, 2017).

2.14 The Role of Intermediaries in Crowdfunding

With the increase in demand of crowdfunding, the necessity of viable and faster means of acquiring funds has increased significantly. A significant aide to successful crowdfunding is the services of crowdfunding intermediaries, who are also referred to as agents of crowdfunding in some territories. Although some businesses still prefer using individual crowdfunding, the role of intermediaries in the crowdfunding business cannot be overlooked.

Leicht et al. (2016) classified crowdfunding intermediaries into hedonistic, altruistic and for profit. Hedonistic intermediaries help businesses raise their target capital at the least struggle possible by simplifying the crowdfunding process. Altruistic intermediaries increase the competitiveness of the crowdfunding process to benefit some companies on the disappointment of other businesses who do not use their platforms. Finally, the for-profit intermediaries are in the crowdfunding business entirely to make profits from the registration costs and interests charged on their customers regardless of the status of their customers.

Berger and Gleisner (2009) studied the emergence of financial intermediaries in the financial markets and the role they play in the market. A major role played by the financial intermediaries to the benefit of potential investors is by screening of the borrowers to ascertain their legitimacy. Although some crooks still find means of conning members of the public, financial intermediaries in the financial markets have measures that enable them detect fraudsters from conning the public. Further, the financial intermediaries help potential investors by providing an open platform in which they can give private loans by consolidating a variety of companies. Moreover, the financial intermediaries in crowdfunding help monitor loan repayment. Berger and Gleisner (2009) stated that it is easier for an intermediary to follow up payments on loans, although at a fee, than leaving the whole obligation to investors who may lack the confidence or persistence to request their repayments.

Further, financial intermediaries in crowdfunding help businesses find funding form the public despite their poor public relations and credibility characteristics. Berger and Gleisner (2009) stated that some of the financial intermediaries standardize the grouping of businesses in their platform to entice private creditors to invest in the disadvantaged businesses despite their lack of attractive credit characteristics. Additionally, Cumming, and Zhang (2016) stated that crowdfunding intermediaries have online platforms that favored some companies through due diligence. Due diligence, in this context, included site visits, credit checks, third-party proof on funding project and background checks. The information available in the intermediaries’ websites helped market the businesses by disclosing their information more to potential investors. Consequently, companies with high due diligence showed higher success rates in acquiring capital through public funding.

2.15 Social media and Crowdfunding

Crowdfunding operations have increased immensely in the last few years. Similarly, social media and use of online platforms have increased in popularity and usage in the last few years. It cannot be assumed that the similarity in the increased adoption of the two services is a mere coincidence and a chance of time. However, due to the past description on the operations of crowdfunding in this study, it can be presumed that crowdfunding and social media have a strong relationship. These relationships are discussed by various scholars and researchers as one way relationships. Crowdfunding tends to benefit more from social media than social media benefits from crowdfunding.

Beier and Wagner (2014) researched on rich media communication in the success of crowdfunding projects in 740 projects sampled in Switzerland. The results should that increased use of rich media increases the chances of success of a fundraising project. Out of the sampled projects the best performing projects had their leaders present a rich media presentation that attracted investors to their businesses. Rich presentation helped businesses that aimed at obtaining capital by crowdfunding, to increase the number of donations, increase the average amount of donation and consequently increase the level of success of the fundraisers. A similar study by Luo, Zhang, and Duan (2012) should that potential investors are more willing to invest in businesses that interact more with them than businesses that show a high level of formality. Study compared the effect of social media and conventional online hosts and search engines to the success of crowdfunding. The study found that although the results of search engines and website hosts could show a positive relationship between their usage and the success of crowdfunding, the results of involvement of social media use in crowdfunding showed a tighter and closer relationship.

Social media helps in promotion of businesses during crowdfunding. A study by Lu, Xie, Kong, and Yu (2014) on the role of social media in fundraisers promotion showed that the most successful businesses, sampled in a renowned crowdfunding platform, used rich promotion techniques in the social media. The rich promotions had all-inclusive information about the business and the objective in a clear statement. Further, the businesses designed different types of promotion messages, posts and videos that caught the eyes of the varying interests of investors. Additionally, the study found that engagement in crowdfunding promotions in social media at the initial point of entry of the business in the crowdfunding operation positively affected the results of the fundraiser. Companies that started their social media promotion did not have enough time to woo the investors to their businesses.

Luo, Zhang, and Duan (2012) discussed the features of social media that lead to the access of entrepreneurs who used social media to increase the popularity of their crowdfunding project. By comparing social media to conventional online media, the study showed that social media has a faster predictive value as social media feeds are updated faster than conventional online media. Investors thus refer social media as a source of updated information. Further, a study by Carvajal, García-Avilés, and González (2012) showed that investors invested more on businesses that were promoted in social media as they are exposed more to the true image of the business through interactive marketing. Through social media, investors get the chance to air their view or get instant clarity on a feature of the business faster than the formal methods of use of letter. Further, through the social media, potential investors are exposed to instant blogs, vlogs, reviews and comments by other investors that allow them make the right decision.

Rishika et al. (2013) did a study on the role of social media to the increased popularity of a business. The study showed that businesses that had most followers and activity in their social media accounts showed a similar level of popularity in the business world. Increased social media activity by the businesses helped them create a good friendship rapport with customer base. Further, high social media activity increased the number of internet feed searches showing that more people are eager to know more about the business. The increased relationship with the public helped the companies acquire funding from the public easier and faster.

Chapter 3: Research Methodology

3.1 Introduction

This research methods chapter covers the different methods that the researcher has decided to use including the research design, the data collection methods, the target population, sampling, data analysis, reliability and validity and research ethics.

3.1 Research Design

Qualitative descriptive research design was used in the study. The purpose of the design is to review a particular event experienced daily by a particular group (Lambert & Lmabert, 2012). The characteristics and facts as for this case were ascertained in an organized manner. This was possible since the researcher had a close knowledge of the study sector. Since the qualitative descriptive research observes structures, opinions held, conditions, evident trends, deviation or relationship it proved appropriate for the study. Moreover, qualitative descriptive research enables the researcher to reduce the complexity of the findings to a huge population by considering the first five start-ups and small businesses within Shanghai Central Business District. According to Lambert & Lambert (2012), qualitative descriptive research portrays relationships as they are. With qualitative descriptive research as the suitable design for the study, information concerning existing conditions was collected. In addressing the research questions, a qualitative descriptive research design that takes into consideration both theoretical and empirical approach was important.

In a great extent empirical and theoretical data was collected and analysed to address the research questions and in order to meet the research objectives. Qualitative descriptive design is essential since it offers various data collection method; the secondary method where the information is gathered from earlier publication and primary method which gathers information through interviews and administering of questionnaires. Through qualitative descriptive research design any existing gaps between the various experiences of the participants can be bridged which in return makes it easier for the researcher to come up with a sound and significant conclusions towards providing relevant recommendations. The design majored on the interpretation of various scholarly works of experts, academics and business professionals, in addition to the context and conversation. The purpose of the study was to have a better grasp of the effect of internet crowdfunding.

3.2 Population

According to Sekaran and Bougie (2016), population refers to the group of people, things, or events that the researcher wishes to scrutinize and which have common observable characteristics. According to Cooper, Schindler, and Sun (2006) population refers to a collection of elements which the researcher wishes to make some inferences. The population of the study included managers and employees working in startups and small and medium enterprises (SMEs) in Shanghai, China. According to Mugenda and Mugenda (2003), in research, a population is a group of people or elements that the study focused on.

3.3 Sample Size and Sampling Technique

The sample size was 94 participants. This is a good number for qualitative descriptive research especially in drawing conclusions. The sample size is suitable to time factor and the accessibility of the participants. The group of people you choose to be in your study are referred to as a sample size according to Copper and Schindler (2006). Nonetheless, some sampling steps have to be taken into consideration before getting to the sample size. According to Mugenda & Mugenda, (2003) a good sample size should range between 10-30% of the whole population. The group elements to represent the whole population are selected using the sampling design. Due to the big number of startups and small and medium businesses in Shanghai, engaging each of the managers and employees was hard as it would be time consuming and tiresome. Sampling assisted in the selection of the fit people to participate in the research. In addition to saving on the time required to conduct the research, sampling minimizes on cost since only the selected items of a whole population take part in the research. Copper, Schindler, and Sun (2006) refer to sampling technique as the process of getting a sample from a population and whose function in the research is vast. The most appropriate sampling technique for this study would be probability sampling. Cooper, Schindler, and Sun (2006) view the method as a random procedure where all the elements in the population have an equal chance of selection. There is need of a sample frame which is a list showing the available population from where the random sample is to drawn according to Gallardo, Lachlan and Davis (2012). Based on this study the sample frame would be the list of managers and employees from five startups and small and medium enterprises within Shanghai, China.

3.4 Data Collection

Both primary and secondary data were obtained in this research. The primary data was gathered by conducting interviews. The reason for using interviews as a data collection method was because it is more accurate as it involves talking to the respondents directly. Also, this method helps to read the body gestures and facial expressions, which are also modes of communication and can help to pass information that is not directly spoken. Also, questionnaires were administered to the participants. Both closed and open-ended questionnaires were administered. A pre-test before the administering of questionnaire was conducted to ascertain the instrument. The pilot study consisted of ten employees from the selected departments of which they were not included in the main study. Since it was incapable of meeting all respondents personally, the researcher decided to handpick only a few despite the biasness involved. Distribution was done through e-mail addition and hand delivery of the questionnaires.

Desk research was used in finding secondary sources. Desk research is either internal or external. Internal desk research involves the generation of information from within the organisation, based on secondary data; whereas external desk research involves the research done outside the organisation (Lang & Fitzpatrick, 2007). The type of external desk research used was online desk research. Secondary data was obtained from books, per-reviewed articles, government publications, and industry reports. Different databases were searched for the most recent and relevant peer-reviewed sources. Some of these databases included ERIC, and Google Scholar. In order to obtain the most relevant sources, particular search terms derived from the research problem were used. Such search terms include ‘Crowdfunding models,’ ‘Crowdfunding in China,’ and ‘Impacts of crowdfunding.’

3.5 Research Instrument

Selecting the instrument to be used in collecting data is very important. The validity and reliability of the data collected should be considered when deciding on the best instrument to use. According to Bastos, Duquia, Gonzalez- Chica, Mesa, & Bonamingo (2014), a reliable research instrument gives the same results after its multiple application in the same sample size. Pilot study was conducted to help in selection of the most appropriate research instrument. Different questionnaires were administered among the sample size within a period of seven days and those recording consistent data were selected.

3.6 Analysis of Qualitative Data

The data analysis method that was used is ‘Thematic Analysis of Data.’ According to Vaismoradi, Turunen, and Bondas (2013), in thematic analysis of data, the researcher aims to determine the recurring common issues in a data. The researcher then identifies the main themes that summarises all the collected views. Therefore, thematic analysis of data was the most appropriate data analysis technique to consider in this research.

3.7 Reliability and Validity

Validity is the extent to which a concept is measured accurately or the degree to which a research study measures what it intended to measure. It is the degree to which the measure reflects the underlying construct, that is, whether it measures what it is meant to measure. Validity occurs in two types, internal validity, and external validity. Internal validity is based on the correctness of the test itself whereas external validity is the capacity to take a broad view of the findings of the targeted population (Heale & Twycross, 2015). When a research is highly valid, it means that the evidence and the literature support the interpretation of findings. To make sure that the research was highly valid, the researcher conducted a theoretical review to obtain a better understanding of how performance appraisal systems impact on the different stakeholders of the humanitarian organization. The study was guided by the objectives and the research question to make sure that the findings were consistent. The questionnaire’s quality was first tested on a 10 person(s) sample.

According to Mugenda and Mugenda (2003), reliability is the precision and accuracy of the data collection instrument. It is the degree to which consistent results are produced by an assessment tool. It is simply the precision and consistency of the research findings. Findings are reliable when the study generates similar results if repeated (Heale & Twycross, 2015). Moreover, the reliability of the research is also determined by the number of errors that exist in the findings. A low degree of errors shows that reliability is high and vice versa. The instrument that would be used in this case is a questionnaire. For the validity and reliability of the questionnaire, a pilot study would be essential. Test-retest reliability (temporal stability) would be the most appropriate indicator of the scale’s reliability.

3.7 Research Ethics

Since this research involved human beings as the participants, there were ethical, social, legal, and political considerations made. According to Resnik (2015), whenever people are used as participants in research, research ethics focuses on the ethical issues that arise. Ethical norms serve the objectives of the study and apply to the researcher. The research was carried out following the ethical standards outlined by the Academy of Management (2012) which states three standard requirements including confidentiality of the information obtained from the respondents, transparency and dignity when conducting the research, and trust between the researcher and the participant.

Confidentiality: The researcher is expected to respect the right and dignity of others considering that meaningful information regarding the respondents is obtained including contact details. Further, the researcher is expected to avoid discriminating against gender, race, age, ethnicity, socio-economic status, and culture. Academy of Management (2013) recommends respect to dignity and rights to privacy to avoid any form of prejudice.
Trust: The researcher is required to have a trustworthy relationship with the respondent. During the study, the researcher should know both the professional and scientific responsibilities of the respondent and their contribution to the community
Transparency and integrity: The researcher is expected to express Transparency and integrity when conducting the research to promote truthfulness, honesty, and accuracy in practicing their profession.

This research maintained the highest level of respect by relating well to all the participants irrespective of age, gender, race, religion, or ethnicity.

CHAPTER 4: RESULTS AND DISCUSSION

4.1: Demographic Analysis

Table 4.1.1: Age of respondents

Age Distribution (Years)	Frequency	Percentage
25-29	39	41.5
30-34	24	25.5
35-39	15	16
40-44	9	10
45-49	3	3
50-54	3	3
55+	1	1
Total	94	100

Table 4.1 shows that the number of respondents between 25 years of age and 29 years is 41.5% (which is equivalent to 39 respondents). 25.5% (which is equivalent to 24 respondents) are between 30-34 years of age. 16% (which is equivalent to 14 respondents) are between 35-39 years. 10% (equivalent to 9 respondents) are between 40-45 years. 3% (which is equivalent to 3 respondents) are between 45-49 years. 3% (which is equal to 3 respondents) are between 50-54 years and 1% which is equivalent to 1 responded was above 55 years. Typically, the sample frame was youthful with 67% of the respondents lying below 35 years.

Table 4.1.2: Gender Distribution

Gender	Frequencies	Percentage
Male	48	51
Female	46	49
Total	94	100

Table 4.2 shows the gender distribution among the respondents, with 51% being males and 49% females.

Table 4.1.3 Academic level and qualification

Table 4.2.3: Education Qualification (Highest)
Lack Formal Education	–	–
Primary level	–	–
Secondary Level	32	34
Tertiary Level	62	66
Total	94	100

Table 4.3 shows that 62 respondents (66%) had acquired education up to tertiary level while 32 respondents (34%) had acquired knowledge up to secondary level. The sample frame thus composed of well-educated people

Comments on Sample Demography

It is evident that most participants in crowdfunding are of a youthful age with 67% of the respondents being below 35 years which was expected since crowdfunding was introduced in China roughly 10 years ago. The sample frame also showed a fairness in gender composition. The China’s economy supports both male and female in the development and running of businesses. There was almost a 50-50 gender among the 94 respondents. The sample frame was also highly composed of people with at least secondary level education. This was essential as they could understand the questions and give accurate response

4.2 Presentation of Findings

4.2.1 Knowledge about crowdfunding

Status	Frequency	Percentage
Lack knowledge	–	–
Have basics of crowdfunding	15	16
Very knowledgeable	79	84
Total	94	100

Table 4.2.4 shows that 16% of the respondents had basic knowledge about crowdfunding. 84% were very knowledgeable on how crowdfunding works. None of the respondents had no knowledge about crowdfunding. The sample frame was thus largely comprised of well knowledgeable people.

4.2.2: Involvement in crowdfunding

Status	Frequency	Percentage
Never participated	6	6
Business starter	23	25
Advisor	8	8.5
Broker	2	2
Investor	55	58.5
Total	94	100

Table 4.2.2 shows that 6 respondents (6%) had never participated in a crowdfunding activity, 23 respondents (25%) had raised funds through crowdfunding, 8 respondents (8.5%) have participated as business advisors, 2 respondents (2%) have participated as brokers while 55 respondents (55%) have participated as investors in startup businesses through crowdfunding. The sample frame thus mainly comprised people who have participated in crowdfunding.

4.2.3 Experience tenure with crowdfunding

Experience Duration	Frequencies	Percentage
No experience	6	6
Months-5 years	40	43
5 years- 10 years	44	47
10 years<	4	4
Total	94	100

From table 4.2.3, 6 respondents (6%) had no experience of crowdfunding, 40 respondents (43%) had an experience of less than 5 years, 44 respondents (47%) had an experience of more than 5 years but less than 10 years while only 4 respondents (4%) had an experience with crowdfunding that exceeded 10 years.

Table 4.2.4: Experience with other financial source

Status	Frequency	Percentage
No experience	16	17
Previously used	74	79
Had professional experience	4	4
Total	94	100

Table 4.2.4 shows that 17% of the respondents had no experience with other forms of financing a project, 79% had used other means of financing projects while 4% of the respondents had professional experience of other means of financing a project. It is evident therefore, that a clear majority of the respondents (83%) had sufficient experience with other forms of financing a project (including partnership and bank loans)

Comments on Relevant Knowledge and Experience

From their responses, most of the respondents had the relevant knowledge and experience on crowdfunding. The sample frame was thus adequate for adequate and accurate information on the application of crowdfunding in China. Further, a majority of the respondents had an experience with other financial sources. They were therefore expected to provide an accurate comparison.

Q1. What are the primary reasons for SMEs participation in crowdfunding?

The ninety-four (94) respondents gave varying primary reasons why SMEs participate in crowdfunding. Fifty-four (54) participants gave only one primary reason while forty (40) respondents gave more than one primary reason. However, most of the respondents gave similar primary reasons that included; funding of a particular project, market and product validation, ability to come up with prospective loyal customers, a platform for acquiring product improvement ideas, and a marketing tool. The most dominant of the primary reasons were the use of crowdfunding for funding of a project and for market and product validation.

Q2. Does crowdfunding contribute to product and market validation of an SME? If yes, how?

Yes, crowdfunding contribute to market validation. Out of the ninety-four (94) respondents, seventy-three (73) respondents asserted that internet crowdfunding helps small and medium enterprises validate their products and their marketing strategies. Twenty-one (21) respondents stated that internet crowdfunding has little influence on either product validation or market validation. From the responses on the applicability of crowdfunding to the product validation and market validation, several themes. The main themes obtained were validation to test the different options by the creator (the entrepreneur), product validation to replace the already present product in the market, validation to replace the already present producers in the market, validation on the profitability of the business idea, validation and morale, and invalidation by crowdfunding.

Q3. Is Social capital raised through crowdfunding a strong predictor of success in SMEs

Yes, social capital raise may be used as a strong predictor of success in SMEs. The researcher provided the ninety-four (94) sample units with a closed end question on the ability of the social capital collected in crowdfunding to predict the success of SMEs. Twenty-four (24) respondents strongly agreed to the hypothesis. Thirty-two (32) respondents agreed which made a total of fifty-six (56) respondents who felt that the success of an SMEs could be predicted through the success of the crowdfunding. Sixteen (16) respondents were undecided and stayed neutral while thirteen (13) disagreed and nine (9) strongly disagreed to the hypothesis. From the data collected it was evident that a clear conclusion could not be made from the primary data collected.

Q4. Does crowdfunding help in the brand promotion of SMEs? If yes, how does crowdfunding promote brand?

Yes, crowdfunding helps in brand promotion of SMEs. Out of the ninety-four (94) respondents engaged, eighty-six (86) agreed that crowdfunding helps in brand promotion. Only eight (8) respondents refuted the current hypothesis. Further, when asked about how crowdfunding promotes brand of SMEs, the respondents gave varying responses. However, most of the respondents gave similar responses. The different ways that were obtained from the responses were;

Crowdfunding provides a cheaper and affordable brand promotion platform
Crowdfunding allows beneficial interactions between the entrepreneurs and their customer segment allowing tailoring of brand to their needs.
Aid by helping businesses come up with better brand elements
Crowdfunding promotes integrated brand promotion by focusing on both products and company.
Brand promotion by helping businesses create communities and appoint community ambassadors

Q5. Why should SMEs choose crowdfunding platforms instead of partnership and other funding resources?

When asked about why the respondents would refer crowdfunding to other forms of raising capital, they had different views. Fifty-seven (57) respondents had multiple reasons while thirty-seven (37) respondents had only one reason each. However, most of the reasons obtained were similar. The main reasons obtained were;

Crowdfunding is a faster, simpler and safer way of raising capital
Crowdfunding platforms are consistent despite the economic situation
Crowdfunding promotes investment
Crowdfunding promotes independence of businesses
Crowdfunding promotes diverse participation in the funding process
Crowdfunding minimizes bureaucracy while funding for projects

Discussion of Findings

Q1. What are the primary reasons for SMEs participation in crowdfunding?

As stated in the findings, the most dominant primary reason was the use of crowdfunding for business funding. Entrepreneurship is a key drive towards economic development through addressing both spatial and temporal issues in the economy. However, entrepreneurs face a number of challenges in trying to introduce new ventures and identify opportunities. The main impediments include; lack of start-up capital and less capital to launch new products (Agrawal et al., 2011). With the emergence of crowdfunding, entrepreneurs are now able to source finance from the general public (crowd) by directly appealing to them. Thus crowdfunding is used to fund particular projects in the firm which have a positive return to the investors inform of reward or equity through sharing the revenue.

Secondly, another primary reason obtained from the responses was use of crowdfunding for market and product validation. It is common in the business market that a large number of entrepreneurs as a proof of concept majorly to determine the existence of a sufficient market validation at the early stages. The proof of concept is essential for non- financial benefits as discovered by Ahlers et al. (2015). In their findings, Ahlers et al. (2015) stated that increased performance of crowdfunding in the small businesses promoted higher levels of business partnership, strong customer base, increased publicity and simpler ways to obtain to obtain organizational employees.

Further, another primary reason obtained on why SMEs integrate crowdfunding in the business is the ability to come up with prospective loyal customers for their products. Through successful crowdfunding campaigns, the business is able to share information on the business and the involved products. Mollick (2014) argues that persons who view the business projects in the different platforms and decide to support, they most likely believe in the success of the business in the long-term. Initial adopters are essential to every start up or small business as they assist in spreading the information about the company’s services without expecting any return. They also act as loyal customers though out the life of the business and depict some special care on the brand’s image.

Moreover, most entrepreneurs use crowdfunding as a platform to gain product improvement ideas. Through crowdfunding an entrepreneur is able to bridge any gaps that may affect the business in the early stages. Through crowdfunding campaigns, the customers are engaged in the business projects where they provide their feedback and ideas on the product and the business projects (Schwienbacher & Larralde, 2010). Feedback from the prospective customers promotes innovation of new ideas which were previously not considered. Moreover, it helps the business to come up with products and services that suitably fit the customer needs and preferences.

Further, crowdfunding is also used as a product promotion platform. Crowdfunding is a free and easy way to reach to the public thus acting as an effective marketing tool. It makes it possible for the small business to explain their vision and mission to the market. Moreover, it allows the entrepreneur to pre-sell a product without necessarily taking the product physically to the market. This is an effective way of gauging the reaction of the customer and analysing the market to determine whether to proceed with a given concept (Mollick, 2014).

Q2. Does crowdfunding contribute to product and market validation of an SME? If yes, how?

As used in the context of this research, product and market validation are both ideas employed by business persons, mostly entrepreneurs, in the improvement of their market or capturing of new markets. In this context, the theoretical definition of product validation is the effort made by producers to gain the confidence of prospect markets that the description of the products, as stated in their product promotion platforms, are the actual description of the products produced by the company. On the other hand, market validation is theoretically defined as the process of determining whether a new product is of sufficient interest to a target market and whether the target market will respond positively to the product. Market validation does not only focus on interest of the target market but also on the affordability of the product by the target market. Both product and market validation aims at creating confidence to producers and investors, that the product being introduced to the market will be bring returns to investments staked in its production.

The researcher sought to identify whether internet crowdfunding contributes to market and product validation of SMEs through primary sources of data and supported by secondary sources of data. In instances where the respondents asserted crowdfunding contributed to market and product validation, the researcher further requested for illustrations and explanations on how crowdfunding would support product and market validation. The majority of the respondents stated that crowdfunding contributes to market and product validation of SMEs. Further, when asked how crowdfunding contributed to product and market validation, some themes emerged and dominated most of the responses as discussed below.

Validation to test the different options by the creator (the entrepreneur) through crowdfunding.

Two participants in the research shared their perspectives while sourcing for crowdfunding for their SMEs. One of the participant (A) stated that he did not sought for crowdfunding due to complete lack of capital, but he wanted to test the best option of two business ideas he had. Being an artist, the entrepreneur wanted to photography as a business while he also thought of starting a music recording studio in his village. Although he had adequate expertise in both businesses, he was torn between photography and music recording as he did not have information about the most appropriate service for the target market. To avoid risking much capital to an investment that will soon fail, he tested the two businesses with two crowdfunding accounts. From the response of willing investors, he decided to open a music recording studio as it seemed to attract more attention.

Another participant (B) had identified two business ideas in her home town. One of the business ideas was to start a local talent nurturing centre while the other idea was to start a private school. However, being virgin markets, she was not sure which business ideas she should have followed to actualise her dream of giving back to the society. After sharing both ideas through a social media platform using two different accounts and presented a grace period before the actual crowdfunding, she noted that the idea of starting a talent nurturing centre attracted twice the number of willing investors than those willing to invest in a private school. She was relieved off the load of deciding which idea to follow and she comfortably sought crowdfunding for development of a local talent nurturing centre.

Product validation to replace the already present product in the market

Sixteen (16) participants revealed to the research team that they used crowd funding to validate the ability of their products to replace the already available product in their local markets. For example, one participant (C) wanted to a multipurpose soap to replace the already available soaps in the market that would not be used all household purposes. However, she was afraid that she could not outdo the already existing suppliers to the market. However, she had identified the business niche as a productive one through socialising with the local people. After sharing the idea through a crowdfunding platform, she realised that more people had identified the niche and were willing to support her with the required capital.

The other two participants (D and E) had almost similar ideas. After realising that the local authorities in their home district provided poor medical services and had inadequate and inefficient resources, they thought of starting a private hospital and a private chemist respectively although separately and independently. However, the two entrepreneurs feared that the local people may be reluctant to trust private health care providers and may not afford the higher charges asked by private health providers. Therefore, they feared that they may not replace the services provided by the authority with private services. However, after seeking crowdfunding, the participant gained market validation as investors felt that the services provided would be profitable as most of the residents valued their health highly. From these examples of participants’ revelation, it is vivid that crowdfunding could help product and market validation of the possibility of replacing the already available products in the market.

However, opposing participants argued that crowdfunding may not necessarily help product validation of an alternative product. The participant argued that crowdfunding mostly entices willing investors and not the consumer segment. In the case of establishment of SMEs, the investors may not be part of the consumer segment and therefore their views on the ability of a new product to replace the existing product may be ill-advised and irrational. Further, the participant argued that investors are more willing to invest in catchy and exiting ideas that seek to solve a clear need in the market and not on improvement of the already available products.

Market validation to replace the already present producers in the market

Twenty-nine participants strongly believed that crowdfunding can be used as a viable platform to gain appeal over other producers in the target market. For example, one of the participants shared their views as another participant shared his experience in crowdfunding and how it helped him gain market validation over an already existing producer supplying to the target market.

One participant (G), who was a business adviser, argued that although many entrepreneurs use crowdfunding campaign to show off their ideas to the public, they can still use the same platform to show off their suitability to satisfy the market over their incumbent producers by exposing weaknesses that the market segment may not have noticed. As an example, the participant (G) highlighted the campaign strategies employed by some politicians in their bids while requesting donations. Most of the politicians appeal the public to support their bids financially by exposing the failures of the incumbent politicians. Similarly, the approach can be used in crowdfunding for SMEs.

Further, anoother participant, who contributed to this theme, (H) was a dairy firm CEO who narrated to the researcher, how he used crowdfunding to gain market validation over an already existing dairy firm and how the platform helped him capture the market. The CEO narrated that during the campaign, he sensitized on the market strategy he was to employ which included employing local people and providing milk with less costs. In the process, he highlighted on the increased influx as the existing producer was not from the market segment and he did not provide employment to the local people. Through this, he gained local support through funding and also captured a large percentage of the local market. From the primary data utilised in this segment, it was clear that crowdfunding would help entrepreneurs gain market validation by helping them oust the already existing suppliers.

Validation on the profitability of the business idea

Often, high rates of product and market validation translate to equally high profits on the business idea. Similarly, crowdfunding may be used to weigh on the profitability of the business idea. However, this relationship contradicts the validation for non-profitable products and charity works. This theme was highlighted as a blend of other themes in this segment.

Eleven participants, affirmed that crowdfunding helped them weigh the profitability of the different business ideas they had and required the best choice. They stated that good response in their crowdfunding quests helped them chose the most profitable ideas as the response matched the trust the investors had in the success of their business ideas.

Similarly, some other nine participants affirmed that crowdfunding helped them improve the profitability of their products. In the case of participant C, crowdfunding helped her ascertain that if she succeeded in starting the business, her soap would sell better and would attract more profits. Participants D and E also stated that crowdfunding helped them ascertain that the services they would be delivering to the public would be well profitable for the success of their businesses.

Moreover, participant H stated that crowd funding validation helped him to gain confidence on the profitability of the dairy firm as through the crowdfunding platform, he was able to convince more consumers to buy their milk products than he could have convinced if he used other means of product promotion.

Validation and morale

In the context of this research, the term morale was used to refer to the willingness and push of continuing with an idea that seemed to be too risky and that the investor could refer to neglect than lose her financial, time and effort investments entirely. From the research, most of the participants, nineteen (19) affirmed that crowdfunding would help an entrepreneur gain more morale in starting the business than he would have if they invested their personal capital.

Eight (8) participants stated that crowdfunding reduces the risks in starting a business. When finances are sourced from the public, with some of them being donations, the entrepreneur bears less risks if the business idea failed. Further, some participants stated that crowdfunding presents the entrepreneur with a feedback that would help them decide on whether to execute the business idea.

Eleven (11) participants perceived morale in crowdfunding in terms of trust. They stated that when investors declare their support to the business idea, they have full trust on the entrepreneur. If trusted to execute the business idea, the entrepreneurs will focus more on the business idea to avoid disappointing the public investors.

Moreover, twenty (20) participants stated that crowdfunding similarly put the morale of entrepreneurs at risk. Most crowdfunding projects do not fully hit the entry target. Entrepreneurs with little knowledge on the forces affecting crowdfunding, may be discouraged to execute their business plans when they don’t hit their target even though their business ideas are excellently viable.

Invalidation by crowdfunding

The emergent theme market and product invalidation occurred dominantly during collection of primary data. In this context, product and market invalidation were used to refer to the disapproval of new products and lack of interest of the product in the target market. Twenty-seven (27) participants commented on market and product invalidation in varying perspective.

Eleven (11) participants believed that crowdfunding has no effect on market and product validation. They argued that most consumers may fail to declare their discontent to a new product when requested to help in raising the required funds and they would opt to just decline the invitation. Further, they argued that most excellent business ideas fail due to presentation of the business idea and not the qualities of the product. Therefore, response during the crowdfunding process depends on a number of factors and not just the acceptability of the product in the prospect market.

On the other hand, sixteen (16) participants believed that crowdfunding has an equal effect to product and market invalidation just like it has an impact in product and market invalidation. They argued that a viable product and a viable business idea markets itself to the public as the presentation of the entrepreneur may not be that poor to annoy prospect investors. Further, they argued that in some forms of crowdfunding, the public provide funds for products they would admire to own in the near future. If in such occasions few investors have contributed to the campaign, it directly reflects that the market has no interest on the product.

Further, to compliment the primary data obtained, the researcher employed secondary data resources. After an in-depth study of literature materials, the researcher observed that most of the findings from the primary data sources were also expressed by previous researchers. Further, the researcher realised that the findings obtained from the sample group were not unique to its setting. Further, the secondary data obtained helped the researcher to expound more on the effect of crowdfunding to market and product validation.

Firstly, Elizabeth et al. (2012) found that market and product validation during crowdfunding occurs through different means. In their findings, Elizabeth et al. (2012) described a scenario of young entrepreneur who wanted to start a youth group photography business but had mixed feelings of the success of the business. He was afraid to fail in the business. However, through positive reception by willing investors he gained more confidence in starting the business. This example supports the ‘validation and morale’ theme that emerged in primary data analysis. Further, Elizabeth et al. (2012) found that some entrepreneurs use crowdfunding not just to acquire funding but also to acquire market validation through social cognitive theory. By engaging a founder member of a business, Elizabeth et al. (2012) found that a large number of investors are do not support other businesses in crowdfunding for profits but to help other people succeed. The social perspective of crowdfunding help the businesses gain confidence of their actions and help them gain easy access to the target market.

Additionally, Agrawal, Catalini, and Goldfarb (2014) explored the application of crowdfunding in product and market validation. They found that most crowdfunding projects are initiated and conducted in small geographical locations as they seem to be more productive. Projects initiated in large geographical jurisdictions may not necessarily contribute to product and market validation as these investors are in business for profits. However, in small geographical settings, the entrepreneur meets friends, relatives and concerned public who may be part of the market segment. Since these people are more aware of the entrepreneur’s abilities, Agrawal, Catalini and Goldfarb (2014) stated that they are likely to give honest perception of the product based on the market structure and ability of the entrepreneur. Belleflamme, Lambert, and Schwienbacher (2012) obtained similar findings that most investors in crowdfunding participate to help entrepreneurs with the motif of solving a social problem and not entirely to make profits. However, Belleflamme, Lambert, and Schwienbacher (2012) criticised the role of crowdfunding in product and market validation that it makes investors and market segment to judge the success of the business idea on their perception of the abilities of the entrepreneur and the relationship between the producer and the community and not on the ability of the product to conquer the market due to its quality and description.

In conclusion, the researcher found that crowdfunding contributes to product and market validation of SMEs in six distinct ways as discussed in the emergent themes as validation to test the different options by the creator (the entrepreneur), product validation to replace the already present product in the market, validation to replace the already present producers in the market, validation on the profitability of the business idea, validation and morale, and invalidation by crowdfunding.

Q3. Is Social capital raised through crowdfunding a strong predictor of success in SMEs

In the context of this research, the success of SMEs referred to the ability of a business idea to be executed and maintain its market value and accomplish the main objectives of its establishment. As discussed in chapter 2 of this report, the researcher used the literature review to create the hypothesis under investigation in this segment. With previous knowledge on the relationship between crowdfunding and the success of SMEs, the researcher wanted to get primary data from the sample design. Further, the researcher utilised secondary data to supplement the findings. From the data collected, it was evident that most of the respondents agreed that social capital can be used as a predictor of success of SMEs. To further supplement the primary findings and make a clear conclusion, the researcher analysed secondary data collected from secondary resources. However, just like the findings in the primary data analysis, secondary data collected showed mixed perceptions on the effect of social capital collected to the success of SMEs.

Hobbs, Grigore, and Molesworth (2016) investigated on the relationship between the social capital collected in crowdfunding with the success of SMEs in creative media industry. They found out that the success of crowdfunding project is directly proportional to the success of SMEs in the industry. From analysis, Hobbs, Grigore, and Molesworth (2016) found out that most creative media businesses fail at the initiation stage due to poor planning. Therefore, investors willing to assist in funding a creative media project are keen in analysing the business plan to be employed. If the business plan is promising and can be trusted, the response from the public will be more positive and hence higher social capital collected. Therefore, Hobbs, Grigore, Molesworth (2016) agreed that social capital collected can be used as predictor of the success of SMEs in creative media industry.

Additionally, Pekmezovich and Walker (2016) researched on the relationship between the success of SMEs and the social capital raised through crowdfunding on a consequential view rather than on the causative view. Pekmezovich and Walker (2016) stated that most founders of SMEs have less financial ability and their success may be only based on the funding collected through crowdfunding. Further, they added that if a founder of an SME struggles much in the establishment of the business, the business may fail later in case of a financial crisis. In their conclusion, Pekmezovich and Walker (2016) stated that the amount of social capital collected from a crowdfunding project is likely to predict the success of SMEs.

Moreover, Golić (2014) researched on the effect of the amount of social capital collected to the success of SMEs. Many SMEs seek funds in their limited geographical setting that is mainly composed of the prospect market. The public tend to contribute to businesses that seem to benefit them in the future. If a business proofs to be successful in solving their needs, the public contribute generously; however, if the business idea does not seem to help the society or make a difference in the market, the public hardly contribute to its establishment. Golić (2014) concluded by stating that the success of an SMEs can be predicted through the amount of social capital raised from a crowdfunding.

However, Belleflamme, Lambert, and Schwienbacher (2012) criticised the effect of the amount raised in crowdfunding to the success of SMEs. Although they did not refute the relationship, Belleflamme, Lambert, and Schwienbacher (2012) claimed that the amount of social capital raised is dependent on a number of factors and not on the ability of the SME to succeed. Firstly, some contributors tend to contribute in crowdfunding based on the persuasion ability of the entrepreneur. However, not all businesses require such persuasive traits and the entrepreneur can equally succeed in them. Further, Belleflamme, Lambert, and Schwienbacher (2012) stated that the amount of finances raised in SMEs is also dependant on the ability and the willingness of the public to contribute to the business based on the strategy used and the target amount in crowdfunding. However, the public can still purchase the products of the business when the products are supplied to the market. In conclusion, Belleflamme, Lambert, and Schwienbacher (2012) stated that the amount of social capital; raised in crowdfunding does not necessarily predict the success of SMEs.

Q4. Does crowdfunding help in the brand promotion of SMEs? If yes, how does crowdfunding promote brand?

Yes, crowdfunding helps in brand promotion. From the research, it was found that crowdfunding performs brand promotion of SMEs in five major ways as discussed below.

Brand promotion by providing a cheaper platform

As stated in the findings, crowdfunding promotes SMEs brand by providing a more affordable promotion platform. Branding plays a key role in Small and Medium enterprises (SMEs) in creating awareness and receiving extensive information from customers in the market. Companies thus must have competence in good marketing plans and brand building. However, most start-up businesses are unsuccessful due to incompetence and lack of resources. Mollick (2014) explains that the only solution that start- up business have is crowdfunding. Through crowdfunding the firms are able to build awareness, use effective channels and create promotional activities at a low budget. Brand awareness can be achieved through good primary brand building elements and secondary associations.

Brand promotion by allowing interactions with the target market.

Secondly, the respondents stated that crowdfunding promotes SMEs brands by allowing favourable interactions between the suppliers and the customers. As competition continues to rise, there is need for SMEs and start-up businesses to develop unique products related to the customer’s needs. However, Barwise and Meehan (2010) argues that building a brand that differentiates a company from its competitors is more essential. Barbara (2015) in her research determined that effective brand building requires high quality brand elements for example good logo, design, name, feature benefit of the product and slogan. The findings showed that through high quality branding elements; interesting perception on the new crowdfunding products and campaigns is created, relationship between the crowdfunding project and the customers is improved and finally it ensures direction of the customers’ attitudes and values towards the new crowdfunding project which results to many people talking about the project and thus increased funding and potential buyers. Singh and Sonnenburg (2012) further states that advanced branding elements have the potential of signalling high quality for customers in case of products with unknown quality.

Aid by helping businesses come up with better brand elements

As observed in the findings from the primary data, crowdfunding agents help SMEs in creating better brand elements. For example, use of Kickstarter as the main crowdfunding platform has helped many small businesses in promotion and marketing especially in a competitive market. With a successfully funded campaign, Kickstarter enable the business to come up with a buying list including all the targeted buyers for the product once it is launched (Lee & Lee, 2016). Nadelcheva, Grimani and Scheider (2015) also discovered that through the large volume of information provided in the Kickstarter the firm has an opportunity of finding their ideal customers and come up with a message which closely fits the customer’s needs and thus their chances to succeed in campaigns is improved. Lee and Lee (2016) further found out that facial presentation in a Kickstarter video increases the chances of connection with a large audience where information on the campaigns and the product is shared.

Bjurling et al. (2017) further argues that crowdfunding restructured innovation in businesses which is not applicable in large firms. They continue to argue that crowdfunding encourages firms to form their brand identity. They state that, when communication in brand identity strictly aligns to its products; consumers will easily perceive the brand and the firm’s vision. In most cases brand identity consists of the firm’s vision, culture and employees. They further include the brand associations which portray the need of a “brand”. Identity continues to be built based on the interaction with the stakeholders or when adapting to the new interests (Bjurling et al., 2017). Similar products in the market are differentiated through brand identity which distinguish one firm form the other. Moreover, when consumers perceive a brand to be more delusional and different the brand has an attractive identity thus consumers are likely to consider it more.

Crowdfunding promotes integrated brand promotion by focusing on both products and company.

As it was observed in the findings, crowdfunding promotes integrated brand promotion through focus on both the products and the company. In a study carried out by Barwise and Meehan (2010) in branding and small business management and marketing, findings showed that marketing strategies were more prevalent in firms due to increased focus on sales. Their research showed that it was difficult to overcome branding difficulties since most companies focused on one product or service. Branding was also viewed as one since the product could not be differentiated from the entrepreneur. Social media branding is implemented in different fields such as, market intelligence, research on Public Relations and promotion and management of customers. Barwise and Meehan (2010) further identified social media branding to be beneficial to companies in the obtaining cheap feedback from the customer and enhance the analyses of customer movement.

Various popular SMEs brands use crowdfunding platforms to introduce and validate their new products or services in the relevant market at a low- cost (Bjurling et al., 2017). The business validation involves the identification of whether a particular target audience is willing to purchase their products and services. In the case of small firms, they lack any advantage of developing new products that no one is interested on at the end. They thus consider crowdfunding platforms as a way of obtaining many customers and verifying their information. If the company is successful in the crowdfunding campaigns, validation is proved to be successful too and thus the company discovers the target audience in the world. Nonetheless, if the campaigns are unsuccessful, this implies that less people are interested in the product and may be the firm needs to reconsider the way of introducing the new product (Barbara, 2015). The company can further use the feedback from the customers to improve the product and or restructure the whole concept.

Brand promotion by helping businesses create communities and appoint community ambassadors

Some respondents stated that crowdfunding helps in brand promotion by creation of communities and appointment of brand ambassadors through the crowdfunding campaigns. Goh, Heng and Lin (2013) indicate that Crowdfunding communities involve many people within the same campaign but with distinct focus. Through this the business is able to reach too many people in a single campaign. Moreover, crowdfunding community is loyal to its projects and this makes it possible for the companies to create communities on their products and hold campaigns. Crowdfunding in addition gives chances for the supporters to play a part in development and amendments in the life of the product and through it loyalty between the project initiators and supporters is created. The campaigns are based on a common path involving risks, uncertainties and obstacles, however their force towards success is much stronger and this ensures close supporters of the brand. In addition, investors will act as ambassadors only when they are regularly involved beyond the campaigns in the firm and their money, time and efforts are treated with respect.

Q5. Why should SMEs choose crowdfunding platforms instead of partnership and other funding resources?

From the findings the following were the reasons indicated by the respondents that would make them prefer crowdfunding to other forms of obtaining capital including partnership.

Crowdfunding is a faster, simpler and safer way of raising capital

Most respondents felt that raising funds through crowdfunding was relatively faster than raising the same amount of money through some other traditional forms. Moreover, traditional sources for example bank loans require some collateral in order to receive some funds whereas in the case of equity based crowdfunding no collateral is needed and there exist minimal chances of bankruptcy since nothing is initially owned. Payback in crowdfunding is through continuous sharing of revenue in the future (Belleflamme et al., 2014). The idea that the firm will experience less risk due to the shared repayment through revenues, small business owners make use of the opportunity to invest in too much risk where they obtain new ways of innovating on business models and existing products.

Crowdfunding platforms are consistent despite the economic situation

Some respondents stated that they would refer crowdfunding to other capital platforms as crowdfunding is more consistent and rigid. Crowdfunding platforms are independent in that they remain stable even during economic instabilities or crisis. This is because they have connections to any financial markets, thus the small businesses get increased number of appealing backers (Belleflamme et al., 2014). This is evident in that; great investors require information on the potential outcomes of the project which traditional ventures do not provide. Crowdfunding platforms in contrast, provide an overview on start-up businesses and this promotes a transparent and open investment.

Crowdfunding promotes investment

Some respondents stated that crowdfunding is better than other methods of raising capital as it promotes investments. This is supported by some secondary resources. Kuppuswammy & Roth (2016) indicate that some crowdfunding platforms promote small investment opportunities thus promotion investment from all available investors regardless of the investment amount. For example, P2P lending method can support up to 10 Dollars of investments. Through this, people who are not financially stable can support the idea of their interest without having to struggle to raise more money in case of large contributions. The platforms achieve this by providing different substantial contributions that are affordable to different groups of public.

Crowdfunding promotes independence of businesses

Some respondents stated that crowdfunding is better than some other traditional forms of acquiring funding as it promotes independence of management and running of the businesses. Similarly, Schwienbacher and Larralde (2010) argued that, crowdfunding platforms especially in equity-based crowdfunding allows small business entrepreneurs to gain more control over their business as compared to traditional ventures where the capitalist has a board position and a say in the future of the firm. Furthermore, crowdfunding platforms involving equity based funding transforms the investors into shareholders and thus they have no effect on the future decisions of the firm. This make the entrepreneur to maintain superiority in the decision making process of the firm.

Crowdfunding promotes diverse participation in the funding process

Some respondents stated that crowdfunding is better than some other traditional forms of acquiring funding as it promotes diverse participation in the funding process. Ahlers et al. (2015) supported this view and stated that crowdfunding promotes visibility to small firms which previously had been limited due to their location. With increased visibility small businesses are able to receive funds from different geographical locations, thus the potential investor network is improved beyond the expected regional limitations. Moreover, with the growing investment form the willing investors; there is a great chance for larger investors to fund the business projects (Mollick, 2015). This could serve as a significant way for small businesses to surpass the financial challenge particularly for the businesses in regions where traditional funding leads to limited investments.

Crowdfunding minimizes bureaucracy while funding for projects

Some respondents stated that crowdfunding is better than some other traditional forms of acquiring funding as it minimizes bureaucracy while funding for projects. Further, Markovic and Ferholz (2015) supported this view by stating that with crowdfunding platforms getting rid of all middlemen involved in fundraising, there is less or completely no room for bureaucracy. The platforms provide the investor’s requirement for qualification as a company’s investor. For example, for one to become an investor, he or she must first create an investor account where they will be logging in to get information on the brand. The relevant platforms later determine the credible investor using the information in their respective accounts. However, some firms work with either certified or uncertified investors in start- ups or grown business ventures.

CHAPTER 5: CONCLUSIONS

Specific reasons for the tremendous increase of crowdfunding in China were that China has a large population and it is economically aggressive making it the largest economy in Asia-Pacific region. Further, the researcher found out that Shanghai China is experimenting uproar in technological advancements, with massive usage of internet that favours the spread of internet crowding on the internet platforms.

The research, which was guided by a set of research questions, sought to determine the primary reasons and benefits of crowdfunding over other sources of funding, relationship between crowdfunding with aspects of business and economic world that include social capital, branding, validation and performance of small and medium businesses in Shanghai China.

From the study, the research concluded that the primary reasons for crowdfunding were; funding of a particular project, market and product validation, ability to come up with prospective loyal customers, a platform for acquiring product improvement ideas, and a marketing tool. Initially, the establishment of crowdfunding was primarily for funding for the execution of a business idea. However, over the last years, the research concluded that some entrepreneurs use crowdfunding for other business elements such as market validation, brand promotion, means of gurning product improvement ideas and as a marketing tool. Although the research found that the most dominant reason is the collection of funds, the other reasons are also primary reasons for plenty of businesses that have already been established through crowdfunding. Additionally, the research concluded that it may be difficult to draw a clear line between the different reasons in application as most crowdfunding clients have more than one reason when starting a crowdfunding project.

The research concluded that crowdfunding plays a significant role in market and product validation. Entry into an already existing market seemed like a difficult task for most SMEs as it requires large capital investments. Business starters either require a had to outdo the already existing marketers with similar commodities or alternative commodities. However, with the help of crowdfunding, the research found that such starters can easily get into the competitive line given the chance to market their products. Further, the research found out that some starters may be unwilling to carry the risk of investing their finances in a business they are not sure that it will gloom. However, with the help of crowdfunding, the research found out that such entrepreneurs find it easier as they gain the required validation and honest feedback from the public about the impact their product may make in the market. Further, the entrepreneurs gain advice on the improvement the product needs to gain complete market validation. Additionally, the researcher found out that crowdfunding helps in product validation by helping starters make concrete decisions on the business idea to implement given a variety of business ideas that seem equally productive and essential. Contributors in crowdfunding tend to contribute to the establishment of businesses that seem more productive and profitable.

Moreover, the researcher sought to know the relationship between the success of a crowdfunding to the success of small and medium enterprises. The research concluded that in most cases, the success of SMEs can be predicted by gauging the success of a crowdfunding project. Investors tend to invest in businesses that seem to be successful. In this case, if business idea does not accrue enough credits in form of financing, the business is likely to fail soon after establishment. Further, the researcher found that some entrepreneurs, mostly young people, may be venerable to acquire funding through other means. Crowdfunding, therefore, represents their only hope in the establishment of the business. Given the current low success rate of crowdfunding projects, the failure of such entrepreneurs to amass their financial target may as well predict the failure of the business idea. However, the researcher found that the failure of a crowdfunding project may not necessarily predict the failure of the business idea as there may be some other factors behind low crowdfunding success. But, generally, the study found that the amount of finances collected through crowdfunding may predict the success of SMEs.

Moreover, the research concluded that crowdfunding has a vital role in brand promotion of SMEs. Crowdfunding platforms not only provide cheaper platforms for brand promotions but also promote their brands in their listing. Some internet platforms were found to list the most successful clients that promotes their brands in the jurisdiction. Further, the research concluded that crowdfunding help in the design of branding elements that would sell the business faster for SMEs by providing design ideas. Further, the research concluded that crowdfunding promotes brand promotion in the target market by providing a platform for mutual interactions between the entrepreneurs and the community in crowdfunding campaigns. Through the campaigns, the research concluded that the entrepreneurs also gain advantage of communities created and the community ambassadors appointed to market the brand products apart from the crowdfunding project.

Further, in the increased popularity and preference of crowdfunding to other means of acquiring financing for SMEs, the research concluded that its popularity can be attributed to both economic and social factors. Firstly, crowdfunding is preferred by business enterprises for its economic benefits that it is faster and safer as it does not require excessive approvals, and safer as it does not carry risks and interests. Further crowdfunding is economically preferred as it promotes investment in the society, unlike other financial alternatives. Moreover, the research found that crowdfunding is socially preferred to other financial alternatives as it gives independence of running businesses to their founders, promotes social welfare through diverse participation of investors and minimises bureaucracy in the crowdfunding process.

In summary, the role of crowdfunding in the establishment and running of small and medium scale enterprises cannot be overlooked in the Chinese economy, moreover in Shanghai. From the just concluded research it is vivid that the increased development of small and medium scale businesses is highly aided by the adoption of crowdfunding in the Chinese economy. Although crowdfunding was initially regarded just like a financial aid, the just concluded research highlights its increased role in the growth of Chinese economy and the social welfare in Shanghai. The inclusivity of the various elements of life in its functions makes it the best preferred financial option in the development of small and medium scale enterprises in Shanghai China.

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The Impact of Internet Crowdfunding Model on the Performance of Small and Medium-Sized Enterprises (SMEs) in Shanghai, China Assignment | Essay Help Services

4.1: Demographic Analysis

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