Dipartimento di Impresa e Cattedra di Advanced Corporate Management Finance MARKET ANALYSIS, ECONOMICS AND SUCCESS DRIVERS OF EQUITY CROWDFUNDING RELATORE: CANDIDATO: Prof. Cristiano Cannarsa Salvatore Luciano Furnari CORRELATORE: Matr. 691441 Prof. Raffaele Oriani Anno Accademico 2016/2017 1 Contents Introduction ............................................................................................................. 4 Chapter 1 – Equity crowdfunding ............................................................................. 6 1.1 Definition and origins ..................................................................................... 6 1.2 Classification .................................................................................................. 8 1.2.1 Equity crowdfunding and other crowdfunding models .............................. 8 1.2.2 Definition of the target and type of campaign: All-Or-Nothing vs Keep-It- All .................................................................................................................. 16 1.3. Equity crowdfunding benefits ...................................................................... 23 1.3.1 Advantages for investors ........................................................................ 24 1.3.2 Advantages for issuers............................................................................ 26 1.4 Equity crowdfunding risks ............................................................................ 30 1.4.1 Risk for investors ................................................................................... 30 1.4.2 Risks for entrepreneurs ........................................................................... 37 Chapter 2 – Market analysis and factors influencing the development of equity crowdfunding ......................................................................................................... 39 2.1. Market Analysis: the equity crowdfunding industry ..................................... 40 2.2 Analysis of factors influencing the development of equity crowdfunding market ................................................................................................................ 51 2.2.1 Banking sector ....................................................................................... 51 2.2.2 Financial market and financial literacy ................................................... 60 2.2.3 Regulation on equity crowdfunding ........................................................ 65 2.2.4 Entrepreneurship level. ..........................................................................102 2.3. Conclusion and suggestions. .......................................................................104 Chapter 3 – Investors of Equity Crowdfunding......................................................106 2 3.1 General characteristics of the typical equity crowdfunding investor .............107 3.2 Italian equity crowdfunding investors ..........................................................110 3.3. Decision making process ............................................................................114 3.3.1. Business model analysis... ....................................................................115 3.3.2. ...or herding behavior? ..........................................................................117 3.3.3. Investors motivation .............................................................................119 3.4 Success Drivers of Equity Crowdfunding.....................................................122 3.4.1 Success drivers reported by the current literature ...................................123 3.4.2 Selected drivers applicable to the Italian framework ..............................126 Chapter 4 – Case study ..........................................................................................131 4.1 Descriptive statistics ....................................................................................132 4.2 Data analysis ...............................................................................................136 4.3 Conclusion ..................................................................................................148 References ............................................................................................................150 Summary ..............................................................................................................156 3 Introduction The main scope of this dissertation is to identify which are the determinants on equity crowdfunding development from two different points of view: (i) the one of the market; and (ii) the investor one. In order do so, Chapter 1 describes equity crowdfunding and its more relevant dynamics; Chapter 2 deals with factors determining equity crowdfunding market development; Chapter 3 identifies the drivers that attracts investors participation, testing its theoretical findings in the case study of Chapter 4. 4 5 Chapter 1 – Equity crowdfunding 1.1 Definition and origins According to the Oxford Dictionary, crowdfunding is “the practice of funding a project or a venture by raising many small amounts of money from a large number of people, typically via the Internet” 1. In other words, crowdfunding could be defined as an innovative financing method that uses Internet as a vehicle for raising capitals from a wide public. Crowdfunding is a particular form of crowdsourcing. This term was firstly used by 2 HOWE in 2006 and describes the practice of obtaining needed services, ideas, or contents by soliciting contributions from a large group of people – the crowd - especially online. 3. In this sense, crowdfunding can be defined as the particular form of crowdsourcing in which the crowd participate mainly giving money for the development of ideas and projects. Although the word “crowdfunding” was created less than 10 years ago, the essence of what this idea represents dates back to almost one and a half century before. One of the most relevant and old phenomena that could be assimilated to a crowdfunding experience was indeed initiated in 1885 in New York, when the Statue of Liberty arrived from France. The sculpture was in fact unfinished and funds were needed to bring it to completion. From the idea of the famous journalist Joseph Pulitzer, a funding campaign was started on New York’s “World” newspaper, setting $100,000 4 as the project’s goal and promising that anybody who donated, regardless of the amount, would have their name published on the newspaper. After only 5 months, the campaign succeeded and the first model of reward-based crowdfunding had a chance to shine. At the basis of this accomplishment there was the reliance on the 1 The Oxford Dictionary of Modern English, 2014. 2 HOWE (2006), The Rise of Crowdsourcing, Wired. Available at https://www.wired.com/2006/06/crowds/ 3 WILLFORT R. and WEBER C. (2016) The Crowdpower 2.0 Concept: An Integrated Approach to Innovation That Goes Beyond Crowdfunding - In BRÜNTJE D. & GADJA O. (eds). Crowdfunding in Europe - State of the Art in Theory and Practice. FGF Studies in Small Business and Entrepreneurship, Brussels: Springer International Publishing, p.214. 4 PIATTELLI U. (2013) Il crowdfunding in Italia – Una regolamentazione all’avanguardia o un’occasione mancata? Torino: G.Giappichelli Editore, p.3-4 6 civic spirit of people and the moral recognition they would get if they contributed to this public venture: their “reward” for helping the community was the element of being publicly recognized as donors. What happened in New York in the 1885 was only one the first historical example of crowdfunding. At the time, the role that now is covered by the Internet, was achieved using another mass media: the newspaper. So as shown above, the collection of money from lots of people is not a real innovation. The real novelty lies in the use of the Internet and in the advent of Web 2.0 to gather people from all around the world in stable and virtual communities. Each individual supplies a small amount of money to give funds for the undertaking of a specific project. But the innovation of crowdfunding does not end with the collection of money. According to NASRABADI A. G. (2015), the potentials of this financing method are intricately linked with the interaction of financial, technological and, especially, social aspects. Indeed, as will be detailed in the following paragraphs and chapters, sometimes the financial aspect plays only a secondary role in this environment. 5 Crowdfunding generally involves the participation of three subjects: (i) the creator of the crowdfunding campaign, that seeks funds for his project or his company; (ii) the contributors; and (iii) the manager of the crowdfunding platform. The creator of the funding campaign, hereinafter generally referred as the promoter, is the subject, a single person or a company, that needs an amount of money for the developing of a specific project. Depending on the specific crowdfunding model considered, it could be referred to in different ways. For instance, he is named “issuer” in equity crowdfunding, simply “creator” in reward and donation crowdfunding and “borrower” in lending crowdfunding. The contributors are the generality of people that decided to help the creator to develop the presented project. They send money to the creator of the campaign in exchange of something that may differ on the base of the crowdfunding model adopted. Also to contributors can be associated different names on the base of the 5 See WILLFORT R. AND WEBER