Answer :

Crowdsourcing- An effective way for funding start-ups

Executive summary

The project report focuses on the common funding challenges that lean start-up companies and entrepreneurs face in their new venture and highlights the importance of crowdsourcing as a substantial source of capital funding.  Crowdsourcing can be viewed as a sourcing model that allows individuals or organizations to obtain goods, resources and services including ideas and finances from a large and open group of internet users. Getting work information and opinions from these people via the internet can also be considered as crowdsourcing, which can then be used, by these entrepreneurs and start-up organizations to build their vision.

The major drawbacks and benefits of crowdsourcing have also been pointed out in the critical evaluation of the topic. It also includes the recommendations for entrepreneurs that they implement to deal with the challenges and drawbacks of funding and use crowdsourcing to its maximum potential for the benefit of their start-up ventures. 

Introduction

Crowd sourcing is often not supported for return of investment for the providers but rather done as paid freelancers and contribute voluntarily (Palacios et al. 2016). One such example is the operations of a traffic app that encourages drivers to report road incidents and compile real-time data for the convenience of the app users. Although this is theoretically also a crowd sourcing model, the concept discussed in the project is mainly focused on the crowd sourcing funding for the new business start-ups for entrepreneurs who wants to use this collaborative effort to gain success in their latest ventures. Although, crowd funding can be seen a support for getting high return on investment in the long term, lean start ups entrepreneurs jump too quickly in the matter of utilising crowd funding as the funding sources. Thus, before opting for crowd funding as the possible funding source, the start up businesses should estimate their transaction sizes, network sizes, project typces and also the risks associated with the crowd funding. In this report, apart from the challenges faced for start-ups, how crowds ourcing funds start-ups have been discussed in details. 

Funding Challenges commonly faced by start-ups

Funding is an important crucial factor for hiring the skill and knowledgeable person, improving the technology of the start-up organization and launching an effective and creative marketing strategy to get a competitive edge in the market. Sourcing the funds for starting the business is quite difficult. Following are some key challenges for sourcing the fund to launch a start-up: 

Products and its markets:

Products and its market are one of the biggest challenges for a start-up business. It is difficult for the start-up business to find out the fit market and relatable product, which helps to gain the market easily (Rowe et al., 2019.). It is required to regularly research the market, understand the needs of the customer, and analyze the competitors market to prepare an effective marketing strategy for the start-up business. It helps in sourcing the funds from several sources and helps to meet the objectives of the start-up organization. 

Creating ascalable Business Model:

To start a business, the organization must build a scalable business model that supports the goal of the organization. It helps to create a competitive edge in the market from a different angle (Kohler, 2016). To expand the business or to start the business with a loan, it is required to prepare a scalable business model for the organization. Because investors are judging the business model that it is scalable or not. The scalable business model helps in sourcing the funds from investors because the scalable business model helps to increase the revenue of the organization.

Determining the budget:

Determining the budget is important to factor in sourcing the funds from the investors (Garg, 2016). If the start-up business seeking money from the investors, then it is important to provide an estimated budget plan for the business.

Effective Business plan:

To start a business, it is required first to develop a business plan, it helps in determining the required money for starting the business. The business plan should have a realistic financial forecast (Kohler, 2016). It helps to forecast the expected cost that is required to source the fund form the investor or loan. Without a practical and realistic business plan, start-up organization cannot be sourcing the fund for starting the business.

Be Specific and concrete:

The lean start-up organization's business plan must be specific and concrete. Investors expect the plan, which provides a more specific plan in spending their invested money (Hulsink and Scholten, 2017). Investors expect the specific and concrete plan, which helps to increase the profit margin of the organization, helps in growing the business.

Finding the right funding option:

To increase the chances of getting or sourcing funds flexibly, it is required to choose the effective and suitable funding option for starting the business quickly. Some funding option for getting the fund to start a business.

 Self-funding is the most appropriate funding option for starting the business. Self-funding investment is a more flexible and quickly available funding option. Bank-loan is a more reliable funding option for starting the business like Angel, Venture capital, crowd funding investors (Hulsink and Scholten, 2017). Crowd funding is a more approachable funding option; it provides potential investors and generates more publicity for starting the business. 

Crowd sourcing for funding start-ups

Crowd sourcing or crowd funding is become a craze among the young generation of the entrepreneurs among the whole world, in recent years (Buttice et al., 2017). The young entrepreneurs who recently enter into the working world and also have less or no knowledge about start-ups or business, in this kind of situation the collection of fund for their start-up plan or their business become a very much tough job. As the banks also refuse to give business loans to many entrepreneurs as they have no strong financial backup. In this type of condition, crowd funding comes into effect (The Conversation 2019). Among the various funding strategies live venture capitalist, Angel funding and crowd sourcing, the last one is an emerging trend (figure 1).

Figure 1: Crowdfunding as an emerging new funding trend

Source: (Vulkan et al., 2016)

The present age is also the age of the internet and browsing. So the entrepreneurs can get a variety of ideas from the internet and also can get enough details and knowledge about their start-up from the internet. Then, they use all these information along with their own and express in an impressive way in front of the investors, in order to impress them. However, the investors, in this case, can invest in the idea of the entrepreneur in two ways, either they can invest direct funds in the start-up plan or they also can buy equity shares of the start-up company and in this way, the investor also can invest(Vulkan et al.,  2016). However, the searching for a suitable private investor is a little bit tough in today’s world. For that reason, the entrepreneurs also can get help from the internet, and by advertising or with the help of social media, the entrepreneurs can find suitable investors for them. However, the in the process of crowd funding the entrepreneurs also can get a small amount of fund from a number of investors which eventually creates a big fund by simply making the addition of those small funds (Niemeyer et al., 2016). 

There are several places also where crowd funding or crowd sourcing is very popular and nontraditional entrepreneurs can get a big amount of fund easily through the crowd funding for their start-up plan. One of the most important crowd funding places is the Silicon Valley of Australia, which is situated in between the Melbourne to Cremorne, in the Silicon Valley; there are many enthusiastic investors available and a number of entrepreneurs also available. Here are some top crowd sourcing entrepreneurs;

Kickstarter: It is mainly for the all kind of emerging artists, Kickstarter help them in the process of receiving funds. However, it is done by relative talks and collaboration upon the idea for the brand new ventures. Since 2009 to 2015, they have pledged funds to many journalism projects (figure 2). However, they sell the products whatever they have made in order to collect fund in order to get success in their start-up business (Fast Company 2019).

Figure 2: Funds pledged to Kickstarter

Source: (Fast Company 2019)

Sellaband: Sellaband can help newcomers or emerging artists or bands to get a settlement in the music industry. However, Sellaband users can donate and invest for number bands through online browsing, and the minimum donation is $10. Therefore, in this way, they can achieve huge funding (Fast Company, 2019).

Media predict:  Media predict mainly works the ethics like the stock market. Here, big companies views and consult with the site users to get an idea upon the consistency of the start-up. Then only they do invest in it (Fast Company 2019).

These are the most successful crowdfunding entrepreneurs; however, many others also available who get the benefit of this in order to stand their dream start-up business.

Critical evaluation of crowdsourcing for funding start-ups

Crowdsourcing being a contemporary and emerging trend in funding entrepreneurial ventures, requires critical evaluation to judge both its benefits and drawbacks. The critical evaluation of this method of investing in the start-up of the nontraditional entrepreneurs has mainly two parts the benefits or the advantages of the process and the drawback or the disadvantages of the process (nibusinessinfo.co.uk. 2019). These are as follows:

Benefits or advantages:

As suggested by Skirnevskiy et al.,(2016) it can be the fastest way to raise fund for the start-up plan for a business of nontraditional entrepreneurs. This method does not demand any upfront fees, which is also a very good sight for the new entrepreneurs. The launching of a project or a start-up business through the digital media platform or the online marketing platform can carry an important value as it is a valuable form of marketing, and as a result, the business or the project draws the attention of the media. In this method, the entrepreneurs have to share his idea about the start-up plan with the investors or the people who want to invest. As a result, they can often get very much valuable feedback or an expert guideline from an experienced person, which certainly becomes helpful for the entrepreneur.

Blair et al.,(2016) suggested that it is also an excellent method to test the merit of the start-up idea. If the people are keenly interested in investing in the idea, then it is certainly proved that the idea has enough merit. However, if the crowd reaction on the idea is low to moderate, then the idea needs some improvement. In this method, investors can track the progress of the start-up plan through the internet. It also brings a certain opportunity to promote the work or business through the network of the investors. The start-up ideas which are may not get appealed to the conventional investors can get the required fund easily. In this method, the investors and the near and dear ones of the investors can become the most loyal and regular customer of the product, that is produced from the start-up plan. Furthermore, it is the most reliable and alternative financing option for nontraditional entrepreneurs.  As they have a major chance to be refused by the bank loan service or from the loan service of any traditional funding.

Disadvantages or drawbacks:

Not all the projects or the start-up plans have the opportunity to apply the method of crowd funding, as for those it becomes a tough process to find the crowd source. This method demands some initial promotion, which promotes the start-up idea in front of the investors and should have the capacity to raise interest among the investor about the start-up plan. However, this type of movement demands some initial money and time. As per Mollick et al,(2016) if the entrepreneur fails to reach the funding target for his start-up plan, then all the other funds have to send back to the investors by the entrepreneur and at the end of the day, the entrepreneur receives nothing. Any kind of mishap or failure related to the start-up project of the entrepreneur destroys the reputation of the start-up business or the project and this kind of failure harms the image of the investors.

According to Niemeyeret al., (2016) in this method the entrepreneur should protect his idea with a patent or copyright system, if he does not do so then there is a certain risk related to stealing the business idea. As to find the investor, the entrepreneur has to put his idea on the internet, from where anyone can steal his idea if he does not protect his idea. If the investors cannot get the expected feedback from the start-up business, then there is a big risk of losing the investors is present. 

Recommendations to entrepreneurs

This is an important procedure to raise fund for nontraditional entrepreneurs. However, the procedure demands some changes in order to mitigate the disadvantages of the process. The investors or the government of the countries should take some initiatives to spread this method throughout the whole world. So, each and everyone can get the benefits of this process. The governments of the countries also should encourage the people to invest in this kind of method so that the progress of the businesses can take place in the country which eventually will play a big positive role for the economy of the country. However, the entrepreneurs should get support from the government of the respective country, so that he can bear the initial cost of the start-up plan very easily. The websites, on which the entrepreneurs upload their ideas in order to attract more investors, should be much more strict and protected. The website should add the protection act in the mandatory field so that any entrepreneur cannot upload his idea of business until he protects his business idea with a patent or copyright process. The government should encourage the entrepreneur if he receives failure in his first attempt; this is also needed so that the entrepreneur can back he and can do concentrate in the next step of his life or in the next start-up plan or in the existing start-up plan too in order to make that successful.

Conclusion

The discussion is regarding then crowd sourcing for the development of the start-ups in the organization.  In this paper, different aspects of crowd sourcing have been mentioned. From the evaluation of the crowd sourcing, the concept development of this context can be found out. Apart from that from the critical evaluation of the start-ups, different ways for the crowd sourcing can be mentioned those are beneficial for setting up the start-up organization. It can be said that the use of the crowd sourcing will be beneficial for the start-ups, as it will help the owners of the start-up to gain new ideas and technologies from different people. Apart from that, the collection of ideas will also be helpful for the implementation of the proper management hierarchy in the organization.

It can be said from the discussion that the use of the crowd sourcing in the organization will help the start-up to invent new products and services that are innovative in nature. Apart from that as the crowd sourcing is assisting the organisation to use various information and knowledge from the different sources and people, it would be helpful for the organization to understand the requirements of the consumers in a proper way. This would be also helpful in order to maintain diversity at the start-ups.  

However, from the discussion, it can be said that certain challenges are identified from the use of the crowd sourcing. Before the implementation of the crowd sourcing, the organization owner should be aware of the concepts of the crowd sourcing. Apart from that, there is a probability that the selection of the wrong idea can lead to the failure of the start-up.