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Crowdfunding small businesses and startups: An appraisal of theoretical insights and future research directions

This is an excerpt from one of my latest contributions on crowdfunding (and crowd investing). Its content was adapted for this blogpost.

Suggested citation: Camilleri, M.A. & Bresciani, S. (2022). Crowdfunding small businesses and startups: A systematic review, an appraisal of theoretical insights and future research directions, European Journal of Innovation Management, https://doi.org/10.1108/EJIM-02-2022-0060

Crowdfunding is an alternative method of raising funds that is independent from financial institutions. Individual entrepreneurs, startups and established businesses can utilize online crowdfunding platforms like Indigogo, SeedInvest and GoFundMe, among others, to access finance for new ventures or existing projects, from a large number of investors, in return for products or equity stakes.

Project initiators would usually specify their financing goals and set time frames with deadlines, for their crowdfunding campaigns. If the pre-set funding goal is not met, they will not be in a position to garner any funds for their project.

The fund-raising campaigns have to appeal to as many investors as possible. Hence, initiators ought to feature engaging content, including texts, images, photos, videos, and the like, to lure investors to support their innovative ideas, startups or business ventures. They launch fundraising campaigns through various crowdfunding platforms, in different markets, to connect with online users, thereby circumventing traditional financial institutions like banks, venture capitalists and business angels.

Therefore, the crowdfunding websites curate the offerings they receive and disintermediate traditional distribution channels by connecting online users directly with project initiators.

More individuals and organizations are turning to crowdfunding sources to raise funds for business ventures, artistic or creative projects and for medical expenses, among other purposes. Alternatively, they use them to donate financial resources to cause-related, socially and environmentally responsible projects.

The crowd-investors would usually put their money in those projects in which they believe will hold lucrative potential. They may be considered as shareholders if they provide capital finance, and contribute to the development and growth of crowdfunded projects.

There are various motivations that could attract individual or group investors to pledge their support to equity crowdfunding campaigns, peer-to-peer (P2P) lending/lending crowdfunding, and to debt-securities crowdfunding, among other crowdfunding products.

Prospective investors might be willing to be involved in the development and success of entrepreneurial projects including startups. They may be seeking a return on investment for their monetary contributions, particularly if they believe that project initiators could deliver exceptional service quality and/or are in a position to develop new technological innovations and cutting-edge products. Hence, they will usually trust and have faith in the investees’ knowledge and capabilities to foster positive change in business and society.

The following sections critically appraise two sides of the same coin. The researchers elaborate on (i) the demand for crowdfunding products, and on (ii) the supply of crowdfunding finance.

The use of crowdfunding platforms to raise capital requirements

Small businesses and startups experience difficulties in raising modest amounts of capital. External threats from the marketing environment including the state of the economy, government regulations, tax laws, labor legislation and fluctuations in interest rates, among other issues, could have devastating effects on such entities.

As a result, they may find themselves in an equity gap, if they cannot raise finance to foster innovation for their business. Their access to equity or debt financing through traditional institutions like banks and/or other financial service providers is usually very limited. Typically, they are required to provide a collateral to obtain finance, even though, young enterprises and startups with promising opportunities for potential investment may usually prefer having a lower debt/equity ratio.

In the past decade, a number of individuals, groups, organizations as well as entrepreneurs and startups resorted to crowdfunding, to finance their ideas, ventures or projects. The most popular crowdfunding products include donation-based crowdfunding, rewards-based crowdfunding, equity crowdfunding, peer-to-peer (P2P) lending/lending crowdfunding, and debt-securities crowdfunding, among others.

⚫The peer-to-peer lending is very similar to traditional borrowing from a bank as crowd investors lend money to a company with the understanding that they will be repaid with interest.  

⚫Equity crowdfunding projects may usually involve the sale of a stake of a business to a number of investors. This type of crowdfunding is very similar to venture capital finance.

⚫Investors may be drawn to rewards-based crowdfunding to receive non-financial rewards, such as goods or services, in exchange of their contributions.

⚫Alternatively, individuals may be willing to donate their funds for charitable, humanitarian or philanthropic purposes, without expecting any financial returns

Project initiators of successful crowdfunding campaigns are capable of communicating their business propositions and solutions, as they raise awareness on disruptive innovations among large audiences through digital media.

The diffusion of innovations theory suggests that there are five key elements that could influence the diffusion of a new idea (through crowdfunding platforms), including the innovation itself, adopters/users, communication/media channels, time, as well as social systems. Crowdfunding platforms allow creators to promote their projects to generate interest and to ultimately lure investors. Notwithstanding, project initiators as well as the crowdfunding investors are affected by various communication channels, including by competing organizations and regulatory institutions.

The subjective norms in society can influence the individuals’ intentions to use innovations like crowdfunding platforms. The crowdfunding projects could attract the attention of competitors, who may be quicker to develop technological innovations or substitute products, as they could have access to financial capital, economies of scale and scope, to mimic small businesses and start-ups’ ideas.

Debatably, this argumentation is synonymous with the resource-based view theory (RBV). New businesses like startups, as well as small businesses may usually possess fewer resources including liquidity, than established businesses. They may also have access to limited competences and capabilities. Notwithstanding, they may not be considered as legitimate as their larger counterparts by their stakeholders, including by the government, creditors, venture capitalists and other investors.

However, in the past decade, a number of regulatory institutions have introduced legislation in various contexts (like the U.S.’s Jumpstart Our Business Startups – JOBS Act). These laws and the revisions that followed, were intended to support early-stage companies and startups to raise their financial requirements through crowdfunding avenues.

Crowdfunding allows for the democratization of funding, as it is essentially borderless and not geographically constrained. Businesses, enterprises and startups can use crowdfunding platforms to raise funds for on their projects. They can appeal to larger audiences through the digital media.

Project initiators are encouraged to engage with online investors through crowdfunding platforms, to provide feedback relating to products or services, in order to increase their chances of reaching their financial goals. Ultimately, it is in their interest to disseminate relevant content to project backers for transparency purposes, and to improve their credentials with stakeholders.

Investments in crowd funding products

Generally, crowdfunding links the creators/proponents of projects with potential investors. The latter ones could avail of crowdfunding digital platforms to reduce their search and transaction costs. These online users hope to identify lucrative investment opportunities that could yield them attractive returns. Such investors may be drawn by high-quality, market-oriented (commercial) projects and by their rewards, as opposed to community-oriented, not-for-profit projects with social or environmental purposes, that may be promoted via low minimum prices, to appeal to sponsors.

Project initiators of commercial entities may be wary of providing details of their intellectual properties (particularly during the early stages of their crowdfunding campaigns), as they may be concerned that someone could steal their ideas, innovations and projects. They could (willingly or unwillingly) decide not to disclose material information like historic defaults or hidden costs, even after the investor becomes a member of the crowdfunding platform.

As a result, investors of crowdfunded projects may not always have adequate and sufficient information on the borrowers of finance, as crowdfunding platforms may not exercise thorough due diligence on their users. This argument is related to the reasoning behind the signaling theory. In fact, many researchers relied on this theory to explore the signals that are communicated by project creators to lure investments from crowd funders.

Notwithstanding, the most popular crowdfunding platforms may or may not operate from the same jurisdiction of the crowd-investors. Hence, they are not always offering complete protection according to local legislation and regulations. Thus, they could not guarantee the same level of comprehensive appraisals that are provided by local financial service providers. This contentious issue could lead to problems related to information asymmetry. In some circumstances, the failure to disclose material information to crowd-investors may result in near-fraudulent consequences.

Investors may usually try to find a tradeoff between potential rewards and risks from crowdfunding opportunities. They could be attracted by (higher than normal) potential returns that certain crowd-funding activities claim to offer. Therefore, they ought to be cautious and vigilant on their possible risks of default.

If equity crowdfunded projects fail, investors could not be in a position to pay back capitals and to provide any returns to their investors. Similarly, the investors of P2P crowdfunding/lending may also risk losing their funds through unsecured loans, especially if the borrowers did not require any collateral. The investors of equity financing may encounter certain difficulties, other than default. They can find out that there is no lucrative secondary market for their shares. As a result, they might find themselves liquidating them at a significant loss, or of diluting their stock value.

Conclusions

This contribution discusses about the benefits and costs of using crowdfunding platforms to raise finance, or as plausible investment options. The authors elaborate about various challenges and identify opportunities for project initiators (like small business and startups), as well as for crowd-investors.

Currently, there are just a few articles that are linking this timely topic with key theoretical underpinnings relating to technology adoption and/or innovation management (e.g. Diffusion of Innovations Theory, Technology Acceptance Model (TAM), Theory of Planned Behavior (TPB), Theory of Reasoned Action (TRA) or the Unified Theory of Acceptance and Use of Technology (UTAUT), strategic management (e.g. Decision-making Theory; Goal Attainment Theory or RBV), accounting and financial reporting (E.g. Signaling Theory or Venture Quality Theory), and normative/business ethics research (e.g. Social Capital Theory, Social Responsibility Theory and Stakeholder Theory), among others.

For the time being, there are limited discursive contributions on crowdfunding of small businesses and startups. This research sought to address this gap in the academic literature. It clearly outlines the facilitators and barriers of using crowdfunding platforms for crowd sourcing and/or for crowd investing purposes, to better understand the demand / supply for crowdfunding.

In future, other researchers may explore the crowd sourcing possibilities of different types of businesses including sole proprietorships, partnerships, limited partnerships, limited liability companies (LLCs), nonprofits, and cooperatives (co-ops), among other entities. They may categorize enterprises, according to their staff count. Prospective authors could investigate the financing of micro enterprises, small and medium sized enterprises (SMEs), intermediate-sized enterprises and/or large-sized enterprises. Moreover, they could even distinguish among various start-ups like small business startups, scalable startups, buyable startups and/or off-shoot startups, et cetera.

A pre-publication version of this this research is available here: https://www.researchgate.net/publication/362223573_Crowdfunding_small_businesses_and_startups_A_systematic_review_an_appraisal_of_theoretical_insights_and_future_research_directions

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A taxonomy of online marketing terms

This is an excerpt from one of my latest chapters on online marketing methods.

Photo by Stephen Phillips – Hostreviews.co.uk on Unsplash

Suggested Citation: Hajarian, M., Camilleri, M. A., Diaz, P., & Aedo, I. (2021). A taxonomy of online marketing methods for corporate communication. In M. A. Camilleri (Ed.), Strategic corporate communication in the digital age. Bingley: Emerald, pp. 235-250. DOI: 10.1108/978-1-80071-264-520211014

One of the well-known online marketing methods is the use of email marketing. It is one of the most popular digital tactics. Despite the current popularity of social media, many individuals still prefer to receive the news about the brands via emails (Camilleri, 2018a). Email marketing is very effective in terms of return on investment (ROI). However, there are many ways that can improve the email marketing performance (Conceição & Gama, 2019). Sahni, Wheeler and Chintagunta (2018) found that by personalizing email marketing (e.g. adding the name of the receiver to the email subject), the probability that the receiver reads the email increases by 20%. Conceição and Gama (2019) have developed a classification algorithm to predict the effectiveness of email campaign. The authors suggested that the open rates were based on the keywords that were featured inside the email. They maintained that the utilization of personalized messages and the inclusion of question marks in the subjects of the email can increase the chance of opening an email. Moreover, they hinted that there are specific times during the day where there are more chances that the marketing emails will be noticed and read by their recipients. These times can be identified by using data mining technologies.

Direct emails could be forwarded to specific users for different reasons. Evans, (2018) described advertising emails in three categories: (i) promotional emails that raise awareness about attractive offers, including discounts and reduced prices of products and services. This type of email is very helpful to increase sales and customer loyalty. Some innovative marketers are using disruptive technologies, including gamification to reward and incentivize online users to click their email links; (ii) electronic newsletters that are aimed at building consumer engagement. Hence, these emails ought to provide high-quality, interactive content to online users. These emails are also known as relational emails that are intended to build a rapport with online users; (iii) confirmation emails that are used to confirm to the customers that their online transactions were carried out successfully. These types of emails are very valuable in terms of branding and corporate image. In sum, the electronic newsletters are intended to redirect online users to the businesses’ websites.

Another major online marketing method is the social network marketing. Brands and corporations can feature their page on social media networks (e.g. Facebook or Instagram) to communicate with their customers and/or promote their products and services to their followers. This can result in an improved brand awareness and a surge in sales. On the other hand, customers can write their reviews about brands or even purchase products online (Smith, Hernández-García, Agudo Peregrina & Hair, 2016). Thus, social network marketing can have a positive impact on electronic positive eWOM advertising in addition to enhancing the customers’ loyalty (Smith et al, 2016).

There are other forms of social network marketing including influencer marketing, video marketing and viral marketing, among others. The social networks are providing various benefits to various marketers as they can use them to publish their content online. Their intention is to influence online users and to entice them to purchase their products or services. Liang, Wang and Zhao (2019) have developed a novel algorithm that can identify the effects of influencer marketing content. Notwithstanding, various social networks such as Facebook and Instagram are increasingly placing the businesses’ video ads for their subscribers. In both cases, the advertisers may use Facebook marketing (Instagram is owned by Facebook) to identify the most appropriate subscribers to serve their ads (Camilleri, 2019). The social networks are a very suitable place for targeted advertising because they have access to a wide range of user information such as their demographical details, and other relevant information (Hajarian, Bastanfard, Mohammadzadeh & Khalilian, 2019a). However, online users may not always be interested in the marketers’ social media messages. As a result, they may decide to block or filter ads (Camilleri, 2020).

One of the most profitable and interesting online marketing methods is the Electronic Word of Mouth (eWOM) (see Hajarian, Bastanfard, Mohammadzadeh & Khalilian, 2017). The internet users are increasingly engaging in eWOM. More individuals are sharing their positive or negative statements about products or services (Ismagilova, Dwivedi, Slade & Williams, 2017). Hence, the individual users’ reviews in online fora, blogs, and social media can be considered as eWOM. Ismagilova et al. (2017) stated that the businesses would benefit through positive eWOM as this would improve their positioning in their consumers’ minds. Moreover, eWOM is also useful to prospective consumers as they rely on the consumers’ independent comments about their experience with the businesses’ products or services. The consumers’ reviews and ratings can reduce the risk and search time of prospective consumers. In addition, individuals can use the review platforms to ask questions and/or interact with other users. These are some of the motivations that lure online users to engage in eWOM.

Influencer marketing is another type of online marketing that is conspicuous with the social media. The influencers may include those online users who are promoting products or brands to their audiences. Hence, influencer marketing is closely related to eWOM advertising. However, in this case, the influencer may be a popular individual including a celebrity, figurehead or an athlete who will usually have a high number of followers on social media. The influencers may be considered as the celebrities of online social networks. They are proficient in personal branding (Jin & Muqaddam, 2019). Hence, the social media influencers will promote their image like a brand. Thus, the influencer marketing, involves the cooperation of two brands, the social media influencer and the brand that s/he are promoting (Jin & Muqaddam, 2019). Social media influencers can charge up to $250,000 for each post (Lieber, 2018), although this depends on the number of their audience and the platform that they are active on. The influencers work on different topics such as lifestyle, fashion, comedy, politics and gaming (Stoldt, 2019). It is projected that influencer marketing will become a $5 to $10 billion market by 2020 (Mediakix, 2019). It is worth to mention that the gaming influencers are also becoming very successful in online marketing.

Viral marketing is another method of online marketing that can be performed by regular social media users (not necessarily influencers). The social media subscribers can disseminate online content, including websites, images and videos among friends, colleagues and acquaintances (Daif & Elsayed, 2019). Their social media posts may become viral (like a virus) if they are appreciated by their audiences. In this case, the posts will be shared and reshared by third parties. The most appealing or creative content can turn viral in different social media. For example, breaking news or emotional content, including humoristic videos have the potential to become viral content as they are usually appreciated and shared by social media users.

The social networks as well as the messengers like Facebook messenger, WhatsApp, et cetera are ideal vehicles of viral marketing as online users and their contacts are active on them. Similarly, other marketing methods such as email marketing can also be used as a tool for viral marketing. In viral marketing the influencers can play a very important role as they can spread the message among their followers. Hence, the most influential people could propagate online content that can turn viral. Nguyen, Thai and Dinh (2016) have developed algorithms that identify the most effective social media influencers that have more clout among their followers. In a similar way, businesses can identify and recruit influential social media users to disseminate their promotional content (Pfeiffer & Zheleva, 2018). Their viral marketing strategies may involve mass-marketing sharing incentives, where users receive rewards for promoting ads among their friends (Pfeiffer & Zheleva, 2018). There are business websites that are incentivizing online users, by offering financial rewards if they invite their friends to use their services. 

Videos are one of the best methods for marketing. Abouyounes (2019) estimated that over 80% of internet traffic was related to videos in 2019. He projected that US businesses will spend $28 billion on video marketing in 2020. The relevant literature suggests that individuals may be intrigued to share emotional videos. Such videos may even go viral (Nikolinakou & King, 2018). The elements of surprise, happiness as well as other factors such as the length of the video can affect whether a video turns viral or not. Abouyounes’s (2019) reported that the individuals would share a video with their friends if they found it to be interesting. Alternatively, they may decide to disseminate such videos on social media to share cognitive (informational) and/or emotional messages among their contacts. Hence, the term social video marketing refers to those videos that can increase the social media users’ engagement with video content. Over 77% of the business that have used social video marketing have reported a positive direct impact on their online metrics (Camilleri, 2017).

With the rise of social media, many online users have started to refine the content of their online messages to appeal to the different digital audiences. The online users’ content marketing involves the creation of relevant messages that are shared via videos, blogs and social media content. These messages are intended to stimulate the recipients’ interest. The content marketers’ aim is to engage with existing and potential customers (Järvinen & Taiminen, 2016). Therefore, their marketing messages ought to be relevant for their target audiences. The online users may not perceive that the marketed content is valuable and informative for them. Thus, the content should be carefully adapted to the targeted audience. The content marketers may use various interactive systems to engage with online users in order to gain their trust (Montero, Zarraonandia, Diaz, & Aedo, 2019; Díaz, Aedo & Zarraonandia, 2019a; Díaz, Zarraonandía, Sánchez-Francisco, Aedo & Onorati, 2019b; Díaz & Ioannou, 2019c; Baltes, 2015). To this end, the advertisers should analyze the interests of their target audience to better understand their preferred content. Successful content marketing relies on the creation of convincing and timely messages that appeal to online users. Zarrella (2013) study suggested that some Facebook and Twitter content is more effective during particular times of the day and in some days of the week.

Native advertising present promotional content including articles, infographics, videos, et cetera that are integrated within the platforms where they are featured (e.g. in search engines or social media). In 2014, various business invested more than $3.2 billion in this type of digital advertising (Wojdynski & Evans, 2016). Native ads may include banners or short articles that are presented in webpages. However, online users would be redirected to other webpages if they click on them. Parsana, Poola, Wang and Wang (2018) has explored the click-through rates (CTR) of native advertisements as they examined the historic data of online users. Other studies investigated how native ads were consistent in different situations and pages (Lin, 2018).

The advertorials are similar to native ads as they are featured as reports or as recommendations within websites. They are presented in such a way that the reader thinks that they are part of the news (Charlesworth, 2018). This type of advertising can be featured as video or infographic content that will redirect the online users to the advertisers’ websites. Besides, these ads may indicate a small “sponsored by” note that is usually ignored by the online users. In some regards, this is similar to the editorial content marketing, where editors write promotional content about a company or a website. However, in the case of editorial marketing, the main purpose is to educate or to inform the readers about a specific subject. Therefore, such a news item is usually presented free of charge as it appears at the discretion of the editor. Nevertheless, both advertorial and editorial marketing can have a positive impact on brand awareness and brand equity.

Various technologies companies including Google and Facebook are providing location-based marketing opportunities to many businesses. However, this innovative marketing approach relies on the individuals’ willingness to share their location data with their chosen mobile applications (apps). For example, foursquare, among other apps, can send messages to its mobile users (if they enable location sharing). It can convey messages about the users favorite spots, including businesses, facilities, et cetera, when they are located in close proximity to them (Guzzo, D’Andrea, Ferri & Grifoni, 2012).

Currently, the messengers are growing at a very fast pace. It may appear that they are becoming more popular than the social networks. Messengers such as WhatsApp, Viber, Telegram, Facebook Messenger, WeChat, and QQ, among others, have over 4.6 billion active users in a month (Mehner, 2019). This makes them a very attractive channel for online marketing. Since messengers can provide a private, secure connection between the business and their customers, they are very useful tools for marketing purposes. Moreover, the messengers can be used in conjunction with other advertisement methods like display (or banner) marketing, viral marketing, click-to-message ads, et cetera. Online or mobile users can use the messengers to communicate with a company representative (or bot) on different issues. They may even raise their complaints through such systems. Some messengers like Apple Business Chat and WeChat, among others have also integrated in-app payments. Hence, the messengers have lots of possible features and can be used to improve the business-to-consumer (B2C) relationships. In addition, other messengers like Skype, Google Meet, Zoom, Microsoft Teams, Webex, et cetera can provide video conferencing platforms for corporations and small businesses. These systems have become very popular communication tools during COVID-19.

Other online marketing approaches can assist corporations in building their brand equity among customers. Various businesses are organizing virtual events and webinars to engage with their target audience. They may raise awareness about their events by sending invitations (via email) to their subscribers (Harvey & An, 2018). The organization of the virtual meetings are remarkably cheaper than face-to-face meetings (Lande, 2011). They can be recorded and/or broadcast to wider audiences through live streaming technologies via social media (Veissi, 2017). Today, online users can also use Facebook, Instagram and LinkedIn live streaming facilities to broadcast their videos in real time and share them amongst their followers.

The display (or banner) marketing may usually comprise promotional videos, images and/or textual content. They are usually presented in webpages and applications. Thus, online banners may advertise products or services on internet websites to increase brand awareness (Turban et al, 2018). The display ads may be created by the website owners themselves. Alternatively, they may have been placed by Google Adsense on behalf of their customers (advertisers).

The display advertisements may also be featured in digital and mobile games. Such online advertisements are also known as in-game marketing.  The digital ads can be included within the games’ apps and/or may also be accessed through popular social networks. The in-game marketing may either be static (as the ads cannot be modified after the game was released) or dynamic (where new ads will be displayed via Internet connections) (Terlutter & Capella, 2013). Lewis and Porter (2010) suggested that in-game advertising should be harmonious with the games’ environments. There are different forms of advertisements that can be featured in games. For instance, advergames are serious games that have been developed in close collaboration with a corporate entity for advertising purposes (Terlutter & Capella, 2013), e.g. Pepsi man game for PlayStation.

The latest online marketing technologies are increasingly using interactive systems like augmented reality. These innovations are being utilized to enhance the businesses’ engagement with their consumers (Díaz et al., 2019b). The augmented reality software can help the businesses to promote their products (Turban et al, 2018). For example, IKEA (the furnishing company) has introduced an augmented reality application to help their customers to visualize how their products would appear in their homes. Similarly, online fashion stores can benefit from augmented reality applications as their customers can customize their personal avatars with their appearance, in terms of size, length and body type, to check out products well before they commit to purchase them (Montero et al., 2019).

The banner advertising was one of the earliest forms of digital marketing. However, there were other unsophisticated online marketing tactics that were used in the past. Some of these methods are still being used by some marketers. For instance, online users can list themselves and/or their organization in an online directory. This marketing channel is similar to the traditional yellow pages (Guzzo et al., 2012). The online directory has preceded the search engine marketing (SEM). This form of online advertising involves paid advertisements that appear on search engine results pages (like native ads). Currently, SEM is valued at $70 billion market by 2020 (Aswani, Kar, Ilavarasan & Dwivedi, 2018). The advertisements may be related to specific keywords that are used in search queries. SEM can be presented in a variety of formats, including small, text-based ads or visual, product listing ads. The advertisers bid on the keywords that are used in the search engines. Therefore, they will pay the search engines like Google and Bing to feature their ads alongside the search results.

The search engine optimization (SEO) is different than SEM. The individuals or organizations do not have to pay the search engine for traffic and clicks. SEO involves a set of practices that are intended to improve the websites’ visibility within the search results of search engines. The search engines algorithms can optimize the search results of certain websites, (i) if they have published relevant content, (ii) if they regularly update their content, and (iii) if they include link-worthy sites. Although, SEO is a free tool, Google AdWords and Bing ads are two popular search engine marketing platforms that can promote websites in their search engines (through their SEM packages). Various researchers have relied on different scientific approaches to optimise the search engine results of their queries. For example, Wong, Collins and Venkataraman, (2018) have used machine learning methods to identify which ad placements and biddings were yielding the best return of investment from Google Adwords.

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