In E-Paper Watch for iPhone and Android’ as backers

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).

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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.