Working Paper WP-1137-E March, 2016 CROWDFUNDING SUCCESS: THE CASE OF KIVA.ORG Melina Moleskis Miguel Ángel Canela IESE Business School – University of Navarra Av. Pearson, 21 – 08034 Barcelona, Spain. Phone: (+34) 93 253 42 00 Fax: (+34) 93 253 43 43 Camino del Cerro del Águila, 3 (Ctra. de Castilla, km 5,180) – 28023 Madrid, Spain. Phone: (+34) 91 357 08 09 Fax: (+34) 91 357 29 13 Copyright © 2016 IESE Business School. IESE Business School-University of Navarra - 1 CROWDFUNDING SUCCESS: THE CASE OF KIVA.ORG Melina Moleskis1 Miguel Ángel Canela2 Abstract Crowdfunding is the process of raising money to fund a project or business venture through numerous investors and via an Internet platform. The objective of this report is to examine the growing phenomenon of crowdfunding as an alternative method for raising finance and the factors that lie behind its success. The analysis focuses on Kiva.org, one of the most successful crowdfunding platforms in the world. Keywords: crowdfunding; Kiva; funding strategy; online platforms. 1 PhD candidate, IESE. [email protected]. 2 Visiting Professor, Managerial Decision Sciences, IESE. [email protected]. IESE Business School-University of Navarra CROWDFUNDING SUCCESS: THE CASE OF KIVA.ORG Table of Contents 1. INTRODUCTION 2 1.1 The Phenomenon of Crowdfunding 2 1.2 Kiva.org 2 1.3 Crowdfunding at Kiva 3 2. THE KIVA WORLD 3 2.1 “Objects” in the Kiva World 3 2.2 Funding and Repayment Process 5 2.3 Risks to Repayment 6 3. METHODOLOGY 7 3.1 Capturing the Data 7 3.2 Processing the Data 9 3.3 Methods of Analysis 11 4. THE LENDERS 11 4.1 Kiva Lenders 11 4.2 Description of the Lender Population 11 4.3 Lending Activity 13 5. THE PARTNERS 14 5.1 Kiva Field Partners 14 5.2 Description of the Partner Population 15 5.3 Partner Risk and Interest Rate Policy 16 6. THE LOANS 17 6.1 Kiva Loans 17 6.2 Description of the Loan Population 18 6.3 Loan Status: Success or Failure 22 7. THE DRIVERS OF SUCCESS OR FAILURE IN FUNDRAISING 25 7.1 Expiration 25 7.2 Defaults 29 7.3 Refunds 32 8. CONCLUSIONS AND FURTHER STUDY 32 9. REFERENCES 34 IESE Business School-University of Navarra 1. Introduction 1.1 The Phenomenon of Crowdfunding Crowdfunding is the process of raising money to fund a project or business venture through numerous investors and via an Internet platform. Online crowdfunding is a relatively new phenomenon that has increased the number of ways in which consumers, entrepreneurs and organizations can access capital. In principle, crowdfunding platforms are designed to put individuals who are willing to lend or invest their money in contact with other individuals, projects or businesses that need financial support. Crowdfunding as a concept predates the Internet since projects such as the Statue of Liberty raised funds from a large number of donors. In that case, the donors were the people of France, enticed through a large number of fundraising events and auctions, back in 1882. Crowdfunding gained traction, however, after the launch of the Internet as a consequence of global connectivity, easy access to online content and increased awareness of financing needs. In 2015, crowdfunding websites helped companies and individuals worldwide raise $34 billion from members of the public (Massolution, 2015). Moreover, the industry is projected to have raised $1 trillion in 2025. The objective of this report is to examine more closely the new and important phenomenon of crowdfunding as an alternative method for raising finance and the factors that lie behind its success. This report serves as the foreground to our academic work on crowdfunding, which seeks to identify theoretically and empirically the factors behind crowdfunding’s success, in the contexts of both entrepreneurship and charity (Moleskis, Alegre and Canela, 2016). We focus our analysis on Kiva.org, one of the most successful crowdfunding platforms in the world. 1.2 Kiva.org Founded in 2005, Kiva.org is one of the world’s largest online crowdfunding platforms where people can lend money to underserved entrepreneurs across the globe. With the mission of “connecting people through lending to alleviate poverty,” Kiva strives to provide safe and affordable access to capital in regions where traditional banking services fail to do so, thereby enabling people to create opportunities for themselves and their families by becoming entrepreneurs. In essence, Kiva acts as an online bridge between borrowers and lenders. The profiles of people from developing countries who are in search of microcredit are posted on Kiva’s platform. Lenders browse the different profiles and invest money in their preferred projects, according to the characteristics of the loan request and the borrower. For instance, the country of origin and gender of the borrower might attract more or less funding depending on the fit with the lender’s preferences, as might the intended use of the loan and the repayment term, which are some of the loan characteristics. Kiva itself does not collect any interest on the loans it facilitates, nor do Kiva lenders gain interest on the loans. Borrowers, however, pay interest to the intermediaries of the financing process, referred to as field partners, who are essentially the ones that bear most of the risk. Based on data collected in March 2015, Kiva is active in 83 developing countries and collaborates with 304 field partners. This collaboration with field partners is a special trait of Kiva, compared to many other lending platforms. The field partners’ role is to facilitate the process by establishing a local presence and advancing the money to the borrowers prior to posting the loan request on the Kiva platform, so as to give the borrowers a head start in their entrepreneurial venture. To date, the organization has crowdfunded more than 1 million loans, totaling more than $800 million, at a repayment rate of 98.4%. 2 - IESE Business School-University of Navarra 1.3 Crowdfunding at Kiva Kiva allows microfinance institutions, social businesses, schools and nonprofit organizations around the world, which it calls field partners, to post profiles of qualified local entrepreneurs on its website. The process begins when a person in a developing country approaches a field partner to ask for a loan, or vice versa. The partner then evaluates the profile of the entrepreneur and accepts or rejects the application. If the application is accepted, the partner uploads the borrower’s profile onto the Kiva platform, including a photograph of the borrower, the description of the intended use for the loan and the amount requested. Loan requests are posted for a period of 30 days only, during which time lenders may respond to the request for funding. Eventually, those requests that do not attract the requested amount are declared to have expired. On the investor side, lenders browse and choose an entrepreneur they wish to fund. Kiva lenders may select and decide to fund any of the available loans posted on the platform. The minimum funding amount is $25 and, on most occasions, a loan is funded by several lenders. The lenders then transfer their funds to Kiva through a special service on PayPal, which waives its transaction fee and thereby spares lenders any costs other than funding. Upon receiving money from various lenders, Kiva aggregates the capital and transfers it to the appropriate field partner. Once a project has been funded, the repayment phase starts. Repayment may occur at different intervals and over varying time periods, according to the agreement between the entrepreneur and the field partner. The entrepreneur returns the borrowed amount plus interest to the partner who, in turn, returns the invested money to the lender but keeps the interest. In that way, the lender recovers the money invested and can decide to withdraw the money or reinvest it in other Kiva projects. 2. The Kiva World 2.1 “Objects” in the Kiva World The key “objects” in the Kiva world are the borrower, the lender and the partner, all of whom are connected to the loan. A borrower is someone who has requested a loan. Borrowers are often referred to as “businesses” or “entrepreneurs” in order to emphasize the entrepreneurial spirit of these individuals who work to make a difference in their lives. A loan may have more than one borrower and, in this case, the loan is considered a group loan. Information about the borrower includes gender and country of origin. A lender is a user registered on the Kiva website for the purposes of lending money and participating in the community. Some lenders have public profiles, known as lender pages, on the Kiva website, where they can share details about their activities and mission. Most lenders, however, refrain from displaying their public information and are referred to as “anonymous.” In addition, not all lenders are active in the sense of having provided a loan. Moreover, lenders can coordinate their activity on Kiva through lending teams. These teams are usually formed around a common interest (sometimes related to lending, sometimes not) or may represent real-world groups outside Kiva such as a church or a class of students. Examples include the Kiva Christians and Harvard University teams. Teams also have profile information, similar to lenders, where they post a team photo and explain why the team members have come together to provide a loan. Lending teams have been described extensively elsewhere (e.g., Hartley, 2010). More information can be found at http://www.kiva.org/teams. IESE Business School-University of Navarra - 3 A partner, or Kiva field partner, is usually a microfinance institution with which Kiva works to find and fund loans.