Crowdfunding Among IT Entrepreneurs in Sweden: A Qualitative Study of the Funding Ecosystem and ICT Entrepreneurs’ Adoption of Crowdfunding

Background: This report is the result of a study commissioned in 2013 by SE - The Swedish Internet Infrastructure Foundation around how entrepreneurs, and in particular IT entrepreneurs, have responded to the increased availability of crowdfunding in Sweden. Much of the focus in international and regional studies has been on making crowdfunding attractive for potential funders, assuming that it is inherently attractive to would-be entrepreneurs. This report tests this assumption by interviewing entrepreneurs within the IT field in Sweden, as well as other actors within the Swedish start-up funding ecosystem. Introduction to Crowdfunding: One of the primary drivers of crowdfunding is that new ventures face considerable difficulties in attracting external financing. However, crowdfunding, defined as the accumulation of small investments in individual projects by a large number of individuals (the “crowd”) via or with the help of the Internet and social networks, allows an entrepreneur to pitch an idea or business plan to more than just family and friends.Crowdfunding Worldwide: Four established types of crowdfunding exist: donation-based, reward-based, equity-based, and lending or debt-based. In May 2013, there were around 800 crowdfunding platforms worldwide, and crowdfunding initiatives raised an estimated 2.6 billion USD in 2012, including about 945 million USD in Europe through 470 000 campaigns. Furthermore, Massolution predicts that crowdfunding will reach volumes of 5.1 billion USD worldwide, with about 1.3 billion USD in European markets. To date, business and entrepreneurial activity comprises 16.9% of all crowdfunding activity while Information and Communication Technology projects comprise a mere 4.8% of activity. Fraud is often mentioned as a risk inherent in crowdfunding, yet a recent study of design and technology projects on Kickstarter in the US revealed that the failure rate was only 3.6% and that those that stopped responding to funders were only worth a mere $21,324 in pledges relative to 4.5 million USD across the rest of the projects, or less than 0.05%. Crowdfunding in Sweden: In March 2011 FundedByMe launched the first Swedish crowdfunding platform catering to entrepreneurs, and several other platforms have followed. We estimated the amount raised in Sweden through reward- and donation-based crowdfunding since its inception in March 2011 until April 2013 to be just around 7 million SEK and through equity crowdfunding around 19 million SEK. Among the most well known crowdfunding projects are Flippin’ Burgers, the Granska sloseri med skattepengar documentary, Virtuous Vodka - FundedByMe’s first equity project and Stockholm MakerSpace. FundedByMe is the largest crowdfunding platform and has raised over 5.7 million SEK in reward- and donation-based crowdfunding for more than 300 of a total of 689 projects on their platform, with one raising 550 000 SEK. The majority have been social interest projects while only 92 have been Internet projects, of which 15 obtained full funding, and 63 technology projects, of which 11 obtained full funding. Around 1.4 million SEK was raised on Crowdculture, a platform primarily for culture and films, with two smaller platforms comprising the difference. FundedByMe says that a mere 17% of funders are repeat funders, a surprisingly low number considering the importance of IT entrepreneurship in Sweden.Important to note is that despite the concerns related to fraud, to the best of our knowledge, there has not been a case of fraud in Sweden despite the considerable number of projects launched on Swedish crowdfunding platforms during the past two years. The Start-up Funding Ecosystem in Sweden: The two primary sources of funding for Swedish entrepreneurs are 1) equity financing, including Venture Capitalists, Angels and private individuals, and 2) soft loans from government agencies, such as Almi and Innovationsbrun. A recent study showed that bank loans have decreased in importance for start-ups in the past seven years.Perspectives of Crowdfunding Platforms in Sweden: In addition to accessing funding, crowdfunding platform providers are of the opinion that their platforms provide other, if not more important, benefits to entrepreneurs in Sweden: 1) to test the market, 2) to attract skills and experience, and 3) to create brand awareness. Crowdfunding platforms believe that the wisdom of the crowd helps weed out potentially fraudulent projects and entrepreneurs who might give the phenomenon a bad name by defrauding funders.Particularly in the US, it has been argued that crowdfunding will disrupt traditional funding models as it will become a substitute for capital from Venture Capitalists, Angel Investors and bank loans. In Sweden, crowdfunding platforms are of the opinion that crowdfunding will instead act as more of an intermediary and complement to traditional funding. Adoption among IT Entrepreneurs: Entrepreneurs do not fully embrace crowdfunding yet as the interviewees noted that state-provided “soft loans” or equity-based forms were the obvious place to look for financing, apart from bootstrapping the financing themselves. Only three of the 14 entrepreneurs interviewed had considered or even had tried crowdfunding. They were of the opinion that crowdfunding does not provide access to the skills and resources that their new venture needed. Within the context of equity crowdfunding, entrepreneurs were uncertain about the amounts of money available in Sweden and were concerned about having a large number of individuals with equity in their companies.Additionally, “cultural barriers”, or characteristics specific to Sweden such as a risk-averse nature, an aversion to “showing off”, a social democracy, and no critical mass of funders, were viewed as hindrances to the growth of crowdfunding in Sweden.Perceptions of Other Ecosystem Actors: Crowdfunding is not yet seen as a “sure thing”, thus it is preferred to aim for more traditional sources of funding. Furthermore, funders may not realize how high the failure rate is among start-ups, potentially causing a backlash a few years down the road. Recommendations. First, actors such as government agencies interested in promoting crowdfunding should create a greater awareness of the benefits of crowdfunding to entrepreneurs in addition to spreading success stories along with the fact that to date the risk for fraud is very little. Second, crowdfunding platform providers should focus on publicizing their role as an intermediary for large funds, facilitate intra-crowdfunding communication, promote a pan-Nordic crowdfunding platform, deal with myths and cultural barriers, and increase market size and clarity. Third, entrepreneurs should seek education and mentorship. Fourth, government should support the development of a crowdfunding industry association or think tank to facilitate the promotion of crowdfunding within Sweden as well as to look outside of Sweden for both good practices and lessons learned from crowdfunding “gone bad” and investigate revising how legal restrictions limit public advertisement of certain private shares.