This era and the challenges faced. More recently, venture

This paper uses the successfully funded venture
‘Pebble: E-Paper
Watch for iPhone and Android’ as a case study from Kickstarter and critically analyses why it has been successful by drawing on
academic literature. It also demonstrates an understanding of the increasingly
important source of funding (crowdfunding) in the internet era and the
challenges faced. More recently, venture
capital markets have grown worldwide ‘both in terms of capital under management
and the number of firms providing finance.’ (Ley & Weaven, 2011). ‘Crowdfunding is a rapidly growing phenomenon wherein
entrepreneurs seek funding for their entrepreneurial activities from a
potentially large audience of interested individuals. Crowdfunding has exploded
in popularity over the last decade and now accounts for tens of billions of
dollars annually.’ (Short et al., 2017). Crowdfunding is of interest because of its increased
importance as a source of funding entrepreneurial ventures in the internet era. Despite
its importance, there remains a paucity of research on crowdfunding. This is
likely to be the case as it is a newer concept. Nonetheless, there is a growing
body of literature that recognises the importance of crowdfunding as a source
of finance for entrepreneurs. Schwienbacher & Larralde’s (2010) study considered ‘crowdfunding as an alternative way of financing
projects’ as well as the ‘factors affecting entrepreneurial preferences for
crowdfunding as source of finance’. (Schwienbacher & Larralde, 2010). Ley and Weaven’s (2011) research tried
to find how crowdfunding ‘may be appropriately adopted within the start-up
equity-financing context.’ This paper begins with
a brief description of crowdfunding and the problems associated. It will then
go into detail on the
successfully funded Kickstarter venture ‘Pebble: E-Paper Watch for iPhone and Android’ and
the reward model of crowdfunding. It concludes by summarising why the venture
was successful.

Crowdfunding is a source of finance which allows individuals (not
financial institutions, such as banks) to contribute to the funding of a
project or venture. This is commonly done over the internet. ‘Several platforms have emerged that help intermediate between
crowdfunders (those who invest in projects) and individuals with a project’. (Schwienbacher & Larralde’s, 2010). The most successful is Kickstarter where since its inception, over
14 million backers have funded 137,538 projects to date. (Kickstarter, 2018). The
platform uses a reward model of crowdfunding.
This is where backers of a project receive a reward based on their contribution
to the project. An independent study by Professor Mollick from the University
of Pennsylvania found that ‘9% of Kickstarter projects fail to deliver rewards’
which the platform considers to be ‘reasonable’. (Kickstarter, 2015).

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The ‘Pebble: E-Paper Watch for iPhone and Android’ is a customisable
watch. It allows customers to ‘download new watchfaces, use sports and fitness
apps, get notifications’ from their phone. (Kickstarter, 2018). After launching
in 2012, it became the ‘the first commercially successful smartwatch’ (Pesce,
2017).

 

To be successful companies should be innovative and creative in addition
to offering customers a value proposition to attract them. Creativity
is ‘the use of imagination or original ideas to create something’. (Oxford Dictionaries, 2018).  Value
proposition ‘is an innovation,
service, or feature intended to make a company or product attractive to
customers.’ (Oxford Dictionaries, 2018). One example of
a value proposition presented to customers is newness. (this is when a product
fulfils needs that customers didn’t previously perceive). Pebble launched the
product in 2012, and it was a new product that satisfied the needs of customers
that other products didn’t; through the new features that customers may not
have identified as a necessity beforehand. This is one of the key reasons it became the ‘the first commercially
successful smartwatch’ (Pesce, 2017). Another
value proposition is customisation (when customers are able to individualise
products to their own liking by changing the colour, size etc.). Pebble has
shown the use of this value propositions to attract customers by allowing them
to individualise their products; making the item more personal for their individual.
They do this by allowing the customer to choose different coloured watches in
addition to letting them to choose their ‘favourite watchfaces using
Pebble’s iPhone or Android app.’ (Kickstarter, 2012).

 

Boden (2004) looks at three types of creativity. The first, ‘combinational’ creativity is shown when there are new
combinations of familiar ideas. An example of this is the cronut and ice-cream
taco. The second, ‘explorative’ creativity is
shown when new ideas are generated by the exploration of structured concepts.
An example of this is the telephone. Using the telephone as an example, we see
that over time; looking at whether it’s possible to take our phones everywhere
has led to the creation of new products such as smartphones. Boden (2004) also
discusses ‘transformational’ creativity which can lead to new structures being
generated. (Boden, 2004). Out of the three
types of creativity, I think that Pebble has shown the use of
explorative creativity. Their
smartwatches are made by evaluating structured concepts; in a similar way to
smartphones. Their watches allow users to measure the distance they run and
even control their music. (Kickstarter,
2012).

 

Kickstarter uses a reward model of crowdfunding. This is where backers
of a project receive a reward based on their contribution to the project. Before
setting up the venture, entrepreneurs will need to know how much money they
will need to raise. If they are not able to reach their goal, they don’t
receive the money. Backed
by 68,929 people who pledged $10,266,845, Pebble achieved
their goal of raising
$100,000 very easily. Pebble also needed to look at how they could reward the
people who contributed to the project. Backers were able to pledge from $1 to
$10,000. Everyone who backed the venture received a particular reward in return
which equaled their contribution. Those who donated $1 received exclusive
updates on the venture. Most (or 40,799 backers to be exact) pledged $115 which
got them one jet black Pebble watch. They were told that the watch would retail
for more than $150. Those who donated $10,000 received a ‘mega distributor
pack’ of 100 Pebble watches in their choice of colour. (Kickstarter, 2012).
Those who pledged $99 were also able to receive a jet black Pebble watch which
they were told would retail for more than $150. This gave them an incentive to
become early adopters and was probably one of the biggest reasons Pebble were
successful. 40,799 backers benefitted by pledging $115 to receive one of the
watches at lower price than they’d go on to retail for, becoming early adopters.
This meant that were getting the product earlier than others, but also at a
lower price. This reward model is used incentivize crowdfunding and through
Pebble we can see that it works. If backers do not receive a reward which they
feel is adequate, they will probably not look to back the venture.

In the internet era, entrepreneurs
are likely to use crowdfunding mostly for ‘cost-reduction reasons.’ (Schwienbacher & Larralde, 2010). Although reducing costs might seem to be one of the most obvious
ones, other key reasons come from the free attention they could receive, in
addition to support from backers for their project before launching a product
or service. The internet allows entrepreneurs to promote their ideas freely and
it also allows them to communicate with their customers through the use of
social media. (Schwienbacher
& Larralde, 2010).

 

There are different crowdfunding models which
will each suit different backers. The reward model of crowdfunding allows ‘the
backer to pledge an amount of money for a reward, with structures tiered to
reward the largest backers to receive the highest value or most unique reward.’
(Wilkinson, 2017). The donation-based model of crowdfunding is
structured in a similar way to the reward model of crowdfunding, with one key difference,
the philanthropic element. People who are donating, don’t
expect to receive a reward in return. (Wilkinson, 2017). This model doesn’t fit
the ‘Pebble: E-Paper Watch for iPhone and
Android’ as backers will want a reward in return. The equity model of crowdfunding allows backers of a venture to
become a shareholder. With this model, ‘the potential returns are
significantly higher … but so are the risks.’ (Wilkinson, 2017).

 

Tung (2015) argues that although the reward
model of crowdfunding might seem to
be an ideal platform for start-up ventures, particularly those offering
tangible goods (such as, Pebble), ‘there are several drawbacks to this system,
especially to its backers.’ (Tung, 2015). Pointing mainly to the fact that
although backers of a venture are rewarded after it is successful in reaching
its target, backers ‘have no say in the company’s trajectory nor would they
share in the company’s future profits despite effectively laying the
foundations of its success.’ (Tung, 2015). This is one clear challenge of the
reward model of crowdfunding for backers. An equity model, used by platforms
such as Crowdcube, could be seen as a better option by the backers of a
venture. The reason being that ‘instead of fixed instant
rewards, backers are given a share of the company in return for their
contribution, effectively becoming investors.’
(Tung, 2015).  If a company goes on to do well,
backers who invest in companies (e.g. Pebble) through platforms such as
Kickstarter, who use a reward model of crowdfunding may want more in return.
They might want a share of the profits as they could feel that their investment
in the early stages was vital to the company’s success.

In Short et al.’s (2017) research on
crowdfunding, they explain that although ‘crowdfunding’s contribution to
entrepreneurial fundraising has resulted in increasing popularity over the last
10 years, crowdfunding is far from a new phenomenon.’ (Short et al., 2017).
Using Joseph Pulitzer as an example, they describe how, in 1885, he was able to
fund the completion of the Statue of Liberty’s pedestal. He wrote an article in
his New York World Newspaper to get the readers to fund the project after ‘the
American Committee for the Statue of Liberty ran out of funds.’ (National Park
Service, 2016). He was able to raise ‘over
$100,000 in six months … to ensure the pedestal’s completion.’ (National Park Service, 2016). As a reward, the newspaper published the names of everyone who
donated; similar to the reward model of crowdfunding we see today. (Short et
al., 2017; National Park Service, 2016).

In the earlier days, entrepreneurs
wouldn’t have had ‘ready access to a large “crowd” from which to solicit funds’
as Pulitzer did. (Short et al., 2017). This hurdle was removed by the introduction of the
internet and the various crowdfunding platforms that are available to
entrepreneurs. Drake (2015) predicted that ‘In 2016, the
number of crowdfunding platforms was likely to hit the 2000 mark’. This clearly
shows that entrepreneurs today have much more opportunity and don’t have to
face the same challenges because of the internet. Crowdfunding transactions are expected to exceed $300 billion by
2025. (Meyskens & Bird, 2015).        

One of the major factors which has contributed to
the funding success of the ‘Pebble: E-Paper Watch for iPhone and
Android’ is the unique
value proposition offered. The Pebble watch was a new product that offered
customers with new features that may not have been
identified as a necessity beforehand which made the product unique. It offered
something different and customers wanted to back the product. Those who did,
were rewarded.
Backers were told that they would receive one of the watches as reward for
pledging just $99 to the venture and that the watch would retail for $150. This
would have given them extra motivation to get the product at lower price, as an
early adopter. The venture was very successful and became one of the most
funded projects on Kickstarter. This led to Pebble launching other products
through Kickstarter which were also very successful. The main attraction was
the actual product. As mentioned earlier, most of the backers pledged $115 or
less and in return received the watch which was sold at a higher price after
launching. (Kickstarter, 2012). Although they were able to successfully fund other
products through Kickstarter, Pebble closed down after it was sold to Fitbit in
December 2016. The reasons for this, is likely to be the increase in
competition from the likes of Apple and Fitbit, who have their own smartwatches
with similar features. Over time, brands such as Apple, have launched their own
smartwatches offering their own unique value propositions. Although the owners
of Pebble may have wanted to keep full ownership of the business, I think that
they could have survived had they used an equity model of crowdfunding. The
reason being that this would’ve give backers extra motivation to invest more
into the business and become shareholders. The internet has made all of this
very simple and entrepreneurs are now able to use crowdfunding platforms, such
as Kickstarter to help fund their ventures. People are able to back the venture
if they feel if the rewards are adequate.