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Xploring Crowdfunding Involvement F Dutch Banks

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Xploring Crowdfunding Involvement F Dutch Banks Exploring Crowdfunding involvement of Dutch banks A explorative study into the reactions and contributions of Dutch b anks in crowdfunding Author: Thom Hollander Master thesis Business Administration First supervisor: Dr. Huang Second supervisor: Dr. Harms University of Twente 2015 1 List of abbreviations AFM - Authority Financial Markets AON - All or nothing model CSR- Corporate social responsibility KIA - Keep it All model KPI – Key performance Indicator KS - Kolmogorov Smirnov MKB - Midden en Klein Bedrijf (Dutch phrashing of SMB) P2PL - Peer to Peer Lending ROI -Return On Investment SMB - Small and Medium sized Businesses SW -Shapiro Wilk Wft - Wet op Financieel Toezicht (Law on financial control) 2 Foreword At the end of the year 2014 I was still contemplating which subject to chose for my master thesis. At that time the Dutch television broadcasted a news article about crowdfunding. I was immediately intrigued by the simplicity and possibilities that this financing method entailed and wondered about the impact it could have on more traditional financing intermediaries, especially banks. So I began my endeavour in trying to find out if banks had already ventured into crowdfunding and what benefits they could provide to investors and entrepreneurs. This thesis was conducted over a time span of approximately 1 year in which the crowdfunding sector was analyzed. Many changes have since then occurred. Platforms were closed done, including the bank backed up crowdfunding platform Seeds, and a steady stream of new crowdfunding platforms emerged. Aside from the changes within the crowdfunding sector itself, banks reactions towards crowdfunding are also changing and during my thesis new developments occurred regarding bank involvement. Many more research could therefore be conducted and new developments, regarding banks and crowdfunding, can be expected to take place. All recommendations and findings must be viewed with this in mind. This thesis could not have been made possible without the help, guidance and advice of my two supervisors dr. Huang and dr. Harms. I would like to thank them for this. I would also like to thank the banks and the interviewees that helped this research as well as the participants in the questionnaire. Lastly, I would like to thank my parents for their patience. Like I always say: ‘’It will be done when it’s done’’. 3 Executive summary This thesis was divided into two studies which were: first, investigate how banks have reacted towards crowdfunding and what their motives were for doing this. Secondly, analyze what banks have contributed to the crowdfunding sector and what they could furthermore contribute based on questionnaires send to investors and entrepreneurs that had participated in crowdfunding. These investors and entrepreneurs had participated in crowdfunding platforms that had partnerships with a bank. The most important research questions in this thesis was: What can banks contribute to the crowdfunding sector? Crowdfunding is a relatively new financing method in which projects are financed by means of a large group of investors which are placed on crowdfunding platforms (Mollick, 2013; Belleflamme, Lambert & Schweinbacher, 2013). Crowdfunding could be a disruptive technology, because crowdfunding platforms take over the roles of other financial intermediaries for sectors like new start up ventures or SMB (Us economic outlook, 2013; De Buysere et al., 2012; Rossi, 2014; Strahan &Weston, 1998). This thesis concludes that crowdfunding matches certain aspects found that correspond to disruptive technology theory i.e. underperforms dominant technology (unattractive to large firms), attractive to customers in niche, rapidly growing and the reluctance of large incumbents to address new technology (US economic outlook, 2013; Tellis, 2006; Christensen, 1996). This thesis concludes that crowdfunding, at the moment, isn’t a disruptive technology because it is still small, unattractive to large firms, not a threat to banks due to the market in which it operates and lastly is unsuccessful in later stage funding (Charitou & Markides, 2003; Us economic outlook, 2013; Hemer, 2011). The (potential) disruptive nature of crowdfunding could have posed problems for large incumbents because they have to opt how to react. Theory indicated that incumbents could either focus on their own business, strike back by disrupting the crowdfunding, play both games or embrace the innovation and scale it up (Charitou & Markides, 2003). Banks under analysis ventured into crowdfunding by means of their own crowdfunding platform (seeds) and partnerships with platforms. According to the interview the most important motives of the bank backed up crowdfunding platform were the unique value proposition and corporate social responsibility. Side motives were establishing relationships and knowledge acquisition. Partnerships of the bank were done because of the motives knowledge acquisition and also corporate social responsibility. The banks contributed differently to the crowdfunding sector. Seeds contributed to the crowdfunding sector because it reduced transaction cost by offering a voting system, extensive guidance and a new business model. These aspects also increased the transaction cost which prevented scalability and were the reason why it was closed. The partnerships that the other bank had contributed less to crowdfunding, only resulting in providing more openness and transparency. This due to the nature of the contract and motive to venture. The questionnaire identified the potential crowdfunding area’s which banks could enhance and were identified to be: social capital, additional funding, guidance and tools. Awareness of partnerships and the crowdfunding area of platforms didn’t lead to any differences in perception of investors and entrepreneurs. This thesis recommends that banks should not venture actively into crowdfunding but stick to their traditional business, because crowdfunding isn’t a threat. Banks should only venture into crowdfunding if they are able to keep transaction costs low whilst at the same time offer either: a new tool, better guidance and screening, their social capital and/or additional funding to projects. 4 Table of content 1. Introduction....................................................................................................................... 7 1.1. Research question and research goal......................................................................... 10 1.2. Academic relevance and practical relevance.............................................................. 11 1.3. Relevant theories....................................................................................................... 11 1.4. Structure..................................................................................................................... 12 2. Theoretical framework....................................................................................................... 13 2.1. Crowdfunding.............................................................................................................. 13 2.1.1. Crowdfunding Models.................................................................................. 14 2.1.2. Crowdfunding in the Netherlands................................................................ 18 2.1.3. Crowdfunding Platforms............................................................................... 21 2.2. Study 1:Disruptive technology.................................................................................... 26 2.2.1. Disruptive technology: main theory............................................................. 26 2.2.2. Crowdfunding as a disruptive technology.................................................... 27 2.2.3. Innovators solutions..................................................................................... 32 2.2.4. Bank motives................................................................................................ 40 2.3. Study 2: Success factors of crowdfunding ................................................................. 40 2.3.1. Investor motives to engage in crowdfunding .............................................. 41 2.3.2. Entrepreneur motives................................................................................... 42 2.3.3. Success factors in crowdfunding projects.................................................... 44 2.3.4. Crowdfunding platforms............................................................................... 46 2.4. Study 2: Role of banks................................................................................................. 49 2.4.1. Transaction cost theory............................................................................... 49 2.4.2. Banks assets.................................................................................................. 52 2.4.3. Reducing transaction costs.......................................................................... 53 2.5. Study 2: Conceptual framework for crowdfunding..................................................... 56 3. Research design................................................................................................................. 57 3.1. Study 1: Analyse of bank motives.............................................................................. 57 3.1.1. Data gathering............................................................................................. 57 3.1.2. Operationalization......................................................................................
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