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Crowdfunding vs. Business Angels

The characteristics and differences

Bachelor thesis research by Vera Lukkezen

In June 2016, Vera Lukkezen graduated from the Tilburg School of Economics and Management at Tilburg University. She followed the BSc Business Economics and wrote her bachelor thesis in the area of entrepreneurial firm support.

Today’s entrepreneurial context is expansive, varied and essentially competitive. The success of a (new) business depends not only on creativity, innovation or feasibility factors, but also on funding opportunities. As the lack of funds represents an issue when developing new ideas into businesses, entrepreneurs have been exploring different methods to finance their ventures. This thesis will examine the differences between two popular funding methods, crowdfunding and business angels, in the context of investment decisions.

Specialized literature defines crowdfunding as the efforts made by entrepreneurs to fund their ventures through small contributions from a large audience by using the internet (Belleflamme et al., 2014). A business angel is defined as a wealthy individual, who directly finances an entrepreneurial venture, without any family connection and who, after the investment, is still involved in the business (Kelly & Hay, 2003). Since the similarities between the two discussed methods of funding are rather small, this paper aims to offer a clear overview of the different ways of financing a startup business, by addressing the question: How do investment decisions of crowdfunders and business angels differ?

The question was addressed by conducting a literature review, which provides knowledge about the two investment procedures and the differences between them. To help determine what these differences are, four core variables are considered: the fundraising process, the individual characteristics, the success factors, and the motivation of funding.

The findings show distinguished characteristics between the two funding methods, when comparing them on the previously mentioned core variables. In terms of the fundraising process: where crowdfunders are usually only interested in the project itself (Frydrych et al., 2014), business angels are also interested in background information about the entrepreneur, the business and the project and thus remain involved in the venture after the investment is made. When it comes to individual characteristics, the average amount of invested capital differs between a crowdfunder (between $6 and $50) and an angel (around $70.000). Additionally, an angel can be defined by some standard characteristics, usually a male aged 35 - 65 with an entrepreneurial background, but a crowdfunder’s profile is harder to determine. The third variable, success factors, also differs between the two funding methods. The crowdfunding’s success is determined by the presence of a video, the number of updates and pledge levels, the duration of the fundraising period, project quality, the margins, geographic location, and the network size (Mollick, 2014). With angels, the key factors are less specific and more focused on the individual characteristics of the angel and the stage of entrance in the project. Lastly, for both crowdfunders and angels, the intention to help others, the possible relationship, the reward, and the ‘fun factor’ are motivations to finance a startup business. However, there is also a difference in funding motivation: while a crowdfunder invests in a project to get recognition, this factor does not influence an angel investor.

In conclusion, this paper suggests that entrepreneurs have to consider different factors in deciding what kind of methods they should approach to fund their business, such as the relationship between the motivation of the funder and the type of reward (financial or non-financial), or the different individual characteristics between crowdfunders and business angels.

References:

Belleflamme, P., Lambert, T., & Schwienbacher, A. (2014). Crowdfunding: Tapping the right crowd. Journal of Business Venturing, 29(5), 585-609

Frydrych, D., Bock, A. J., Kinder, T., & Koeck, B. (2014). Exploring entrepreneurial legitimacy in reward-based crowdfunding. Venture Capital, 16(3), 247-269

Kelly, P., & Hay, M. (2003). Business angel contracts: the influence of context. Venture Capital, 5(4), 287-312

Mollick, E. (2014). The dynamics of crowdfunding: An exploratory study. Journal of business venturing, 29(1), 1-16

Schwienbacher, A., & Larralde, B. (2010). Crowdfunding of small entrepreneurial ventures. Handbook of entrepreneurial finance, Oxford University Press