Table of Contents CROWDFUNDING IN PAKISTAN: WHAT MOTIVATES THE CROWD TO INVEST IN START-UPS? 2 Introduction: 2 Literature Review: 3 Research Methodology: 7 Findings: 8 Conclusion: 10 Works Cited 11 Appendix (interview guide) 12

CROWDFUNDING IN PAKISTAN: WHAT MOTIVATES THE CROWD TO INVEST IN START-UPS?

Abdul Munim Khan, SZABIST Karachi, munim-khan777@yahoo.com
Rana Muhammad Shoaib Hassan, SZABIST Karachi, shoaib.hassan99@yahoo.com
Jawad Amjad, SZABIST Karachi, jawadbukhari51@yahoo.com

Abstract
Crowdfunding is an increasingly popular source to fund start-up, worldwide. In crowdfunding, a form of crowdsourcing, many crowdfundees collectively fund a start-up by providing parts of the requested funding in prospect of financial returns or social return. While extant research has provided insights into the crowd’s motives for participating in various forms of crowdfunding initiatives, we know little about the motivations that drive the crowd to invest in start-ups via crowdfunding. In literature, there are ongoing calls to investigate this phenomenon since it is expected that motives for investing in start-ups via crowdfunding differ from motives for engaging in other forms of crowdsourcing initiatives. Against this background, this research aims at investigating why crowdfundees fund start-ups. In this research paper we build on related literature to theoretically develop a research model and plan to validate this model with an empirical survey on an equity-based crowdfunding platform specialized on start-up funding. By giving concrete answers to the research questions, this research has been able to build deeper understanding of the crowd’s motivation for investing in start-ups.

Chapter 1: Introduction:
Financial capital represents a necessary ingredient for entrepreneurial survival, growth and success. In order to support their growth, entrepreneurs tend to get capital from their personal sources i.e. friends, family or personal savings. But all of these sources have their limitations. To avert these limitations these entrepreneurs look for financial aid from banks or other financial institutions, but in economies like Pakistan this source is also very difficult to access because of such higher interest rates and unwillingness of banks to support the people in most of the cases. In such situations these entrepreneurs tend to move towards such sources which could be less costly and efficient.
In such situations internet could be one of the sources that might help these entrepreneurs get their capital. With the commercialization of internet the means of communication and access to worldwide information along with a concept of global village has been evolved more rapidly. With this rapid evolution of internet many new types of business have originated one of which is crowdfunding. Crowdfunding is all about getting small denominations from people all around the globe for some cause or some idea. This crowdfunding platform could be a very useful source for entrepreneurs.
As there are many young people in Pakistan who have revolutionary ideas and they want to bring something good for themselves as well as for the society with these ideas. But they don’t have enough resources to apply their ideas. With this study we want to analyze if they could gain enough capital for their ideas through this platform. In order to understand the dynamics and potential of this industry in Pakistan we have kept the major focus of our study to the motivational factors that could drive the investors/local community of Pakistan to invest in such projects.

Chapter 2: Literature Review:
When starting a new project or business an entrepreneur requires some capital to invest in his ideas, but it is always difficult to collect this capital from personal source especially for young entrepreneurs. Their first resort is always their family and friends but when they don’t get access to enough capital they tend to look for other sources. The typical sources of capital generation like banks sometimes are not willing to invest in the unique ideas. At that time sources like Crowdfunding seems to be the best.
Ventured and entrepreneured in 2008, a new idea of Crowdfunding, where initial capital requirements could be generated from general crowd in form of small dominations, by some students of California University, became one of the most feasible sources for non-equity based capital generation (indiegogo, 2012). Before 2008 nobody was even aware of the term Crowdfunding and there was no prior research at that time about the concept. After its successful implementation in 2008 researches were conduct and it was first defined as: “The practice of raising funds from two or more people over the internet towards a common Service, Project, Product, Investment, Cause, and Experience.” (wikipedia/crowdfunding).
And another author defines crowdfunding as:
“Crowdfunding involves an open call, essentially through the Internet, for the provision of financial resources either in form of donation or in exchange for some form of reward and/or voting rights.” (Belle , Lambertz , & Schwienbacher)

These brief definitions of crowdfunding tell all about its functionalities. Crowdfunding is very much like crowdsourcing where there are some seekers, seeking funds for their projects and then there are some investors (crowd), willing to invest in the projects most feasible for them. Crowdfunding is one of the most rapidly emerging non-equity based funding for young entrepreneurs and small business operators. Young people with ideas present their ideas through online portals in front of general public, offering them some share from their profits or they offer them to invest in their product for which they would get discount price products. A very useful aspect of this source of funding is that it opens the opportunity to get funds from everywhere around the globe. In western world the idea of Crowdfunding has been very much successful. Currently this Crowdfunding industry grew by $5.1 billion this year. (Ordanini , Marta , & Par, Crowd‐funding: transforming customers into investors through innovative service, 2011) Moreover after the acts like JOBS (jumpstart our business startups) in USA, Crowdfunding has become a source of equity generation in many countries and seems to poise a more fruitful growth. (Mitra & Gilbert, The Language that Gets People to Give:, 2012) The worldwide industry analysis shows that the major funding comes from the European markets (43%), USA (35%) and rest from the remaining world. (Belle , Lambertz , & Schwienbacher)
Researchers have researches on Crowdfunding show that the use of language and phrases in the promotion and presentation of any idea plays a very major role in the response of people where the persuasion theories such as rule of reciprocity and scarcity principle are the major player (Mitra & Gilbert, The Language that Gets People to Give:Phrases that Predict Success on Kickstarter, 2013). Other researches show that because of Crowdfunding, funding is no more geographically constrained. Funding is highly skewed, where some projects get major funding while others fail. Funding propensity increase with the increase in accumulated capital. In early stages of capital generation friends and family play major role. Both donators and creators are highly optimistic in the initial stages about outcomes and somehow Crowdfunding might be able to outperform traditional sources of capital generation. (Ordanini, Miceli, & Pizzete, transforming customers into investors through innovative service, 2011)
Crowdfunding projects could be differentiated into four forms, 1) donation based: where people are willing to invest without any expectations of being rewarded, 2) reward based: where reward is expected but in non-financial like products, services or others, 3) Lending based: where the major purpose of investing is to get financial return like interest, 4) equity based: where the return is expected in form of equity, equity like shares or dividends. (Bretschneider, Knaub, & Wieck)
The most essential part in obtaining capital for any project through crowdfunding is the willingness of the investors to invest. Therefor it is critical to understand that why an investors would be investing. The answer to this question could be understood by understanding the motivation factors of human behavior.
Investors bring in their cash when they find the project interesting and worthy. They evaluate any project on the basis of its appeal. Researchers have identified certain theories which are helpful in understanding the motivation of investors. These theories are rule of reciprocity, scarcity principle, social proof and cognitive evaluation theory. Reciprocity is the sense of returning a favor against a favor. Requestors or seekers attach a product or service in return of the investments. Scarcity principle is the technique of increasing the value when a product becomes scarce. Social proof is more like getting the expert opinions or getting the idea if the project is going to poise some future growth. (Mitra & Gilbert, The Language that Gets People to Give:Phrases that Predict Success on Kickstarter, 2013) However the cognitive evaluation is the evaluation of the narratives presented by the seekers to appeal the investors. These narratives present some intrinsic and extrinsic cues to grab the investors. Extrinsic factors could be the future rewards attached to the investments, and intrinsic factors attached to the investments could be the feel of helping others or the feel of being better. Thus crowdfunding has also been regarded as pro-social lending. (Allison, Davis, & Short, 2014)
However to understand the basic motivation factors derived from these intrinsic and extrinsic factors, it is also necessary understand Motivational psychology. Motivational psychology differentiates between motive and motivation as; motives are an individual’s content specific psychological dispositions. These dispositions describe how an individual give importance to certain set of goals. These could be inborn or could be developed over the time during the procedure of socialization. However motivation is the procedure of how a person’s motives are activated. (Schwienbacher, 2012) The basic motivational model is described in the figure below; this model very briefly describes how the potential motives of a person convert into the activated motives and then subsequently converts into his or her actions.

Figure 2.1 The basic motivational model.
The basic actors in the motivation of the investors are the extrinsic and intrinsic factors. The factors have been classified as intrinsic and extrinsic factors. (Bretschneider, Knaub, & Wieck) Intrinsic factors majorly include the investor’s internal motivators, which might be the fun in investing, curiosity about the crowdfunding, alternative ways of investing, reciprocity (getting a favor in return of a favor), emotional attachment with the startup business, relation with the project initiators, and the regional identification of the project. Then there are the extrinsic factors which motivate the investors, these could be the social recognition of the project, personal need of return from the project, and certain other factors relevant to it. Our research will consider the above stated motivational diagrams to understand the motivational factors of the investors.
Chapter 3: Research Methodology:
Our research seeks to explore the motives that encourage the crowd to invest in start-ups via crowdfunding. Since perceived motivation-related issues can best be expressed by investors participating in the community themselves, we have conducted some in depth interviews. In this study we focused upon the industry experts, who are opinion makers for the investment purposes and are also investing in crowdfunded projects. As these people either have their own experience of investing or they have the best knowledge of the investing pattern of the industry.
The interview protocol we used is detailed in the Appendix. Consistent with recommendations in the literature (Bretschneider, Knaub, & Wieck), we designed the protocol to cover the main topics pertaining to the research questions, but at the same time leaving room to both the respondent and the researcher to extend the discussion to other unexpected issues. Since qualitative inquiry is necessarily an iterative process, the question wording changed slightly over the course of the interviews and evolved over time. Moreover, some of the questions were added to capture additional issues that surfaced during discussions in the early interviews. Each interview lasted approximately forty minutes, with at least two members of the research team present. Interviews were conducted both personally (two) and by telephone (via Skype) (one).
To enhance the reliability of the information derived from the interviews and to strengthen support for the constructs and relationships emerging from our analysis, we triangulated the interview information with the previously described secondary data. We also continuously monitored the firms’ web sites, to keep abreast of available projects and their investment flows, as well as consumer participation and web site improvements. Throughout the project we also kept track of news published about crowd-funding in general and about the particular web sites analyzed.
We used the coded and categorized data to perform a thematic content analysis through an inductive process in which we progressed from categorization to abstraction, comparison, and integration.
Limitations: All findings are of the qualitative and exploratory nature as the nature of our inquiry. Although we provide a clear rationale for sample selection, and took great care in adhering to well-established procedures during data collection and triangulation, we can only offer an inductive discussion of and preliminary insights about the crowd-funding phenomenon. Moreover the respondents we selected were the industry experts and were those people who have their main income coming out of the investments they have made. So this paper does not actually cover the real consumers of crowdfunding. So there is scope left for quantitative research in order to get more accurate and useful results in Pakistani market.
Chapter 4: Findings:
Based upon the interviews we find out following motives for investing in any crowdfunded projects. First of which is the curiosity, as mentioned in self-determination theory, is one of the intrinsic factors that could motivate any investor to invest in the crowdfunded project. This curiosity could arise from either one reliable source or multiple sources. But when arouse it could be a major factor to the success of these projects.
Since crowdfunding provides a platform where new ideas could be shared and with the help of crowd these could be executed. These ideas get money because sometimes people seek fun and enjoyment while investing. As in Pakistan there is no much knowledge and regulations relevant to crowdfunding but in America, from where the 35% of global investments generate, the Government has developed special act JOBS to secure investors from greater losses. So people over there are more interested in investing just for fun because in most of the cases they are backed by the government. If such regulations are to be practiced in Pakistan as well, then there is a huge chance that it could also become a source of equity based capital generation source like America and Europe.
At the platform of crowdfunding people can present any idea they want regardless of its nature. Initially when it started the ideas was more sort of society oriented and they did not offered any kind of return but people tend to invest in these ideas because they felt that they could somehow help the society to develop. From the literature we have translated this phenomenon as Altruism. It is directly inverse of selfishness, a feeling of helping others on the cost of one self.
Sometimes it happens that the investors or donors have emotional relatedness to the project or project initiators. If they know the project initiators and they are investing in to help them or only because they have a certain level of trust on them, then they would invest only. Such relationship in relevance to the literature review is classified as the direct identification. Then there is a case when investors have an emotional link with the project cause. Like one of the interviewees whom we were interviewing, shared an experience, invested in a project which was to help the dumb and deaf children because one of his siblings had the same problem by his birth and he felt an emotional attachment with those children and he invested just for the cause. Such relationship is classified as indirect identification.
In Pakistan people are very much resilient to invest in the projects that are out of the regional boundaries of Pakistan, because they think that there is a high chance of fraud and run away in such long distances. So they would prefer to invest in the projects which are in regional reach. So such factor is classified as regional identification.
One of the many factors for investing is the social recognition. People in Pakistan tend to show off themselves by investing in valuable or plausible projects to get appreciation from the society and sense of achievement. This factor is one of the external reasons that can bring investor into any project. Such reasons are classified as recognition.
Sometimes it happens that someone has a need for some product which is not yet available in the market or it is not cheap enough for get him. Then he seeks for the ways from he could get such product easily. At crowdfunding sites entrepreneurs come with innovative ideas as well as innovative offers. Sometimes these idea initiators come up with the offer of purchasing pre-production which means that purchase the product before it is made on cost basis or discounted rates etc. These types of factors are classified as personal need.
What kind of investment is when it has nothing in it as a return? The most important and the most attractive factor for investing in any project is the return associated with it. Investors invest in any project when they are offered favorable returns.
Despite of all these factors there are some other factors that are also associated with the motivation for investment. Sometimes the investor is interested in the team characteristics if the idea initiators while sometimes they are more focused about the idea characteristics. It also happens that the investors follow the decision made by others. Like if any member of their social group is investing in any project and they are influenced by that person, they will also invest in that project. This type of factors is classified as herding.
Chapter 5: Conclusion:
From our findings we have been able to portray a qualitative interpretation of the motivational factors that could bring in the investments. Based upon our findings we have developed the following chart to express the motivational factors relevant to investment behavior

Figure 5.1 motivational factors relevant to investment behavior
A very major reason for the lack of interest and investments is the lack of education to the people. Thousands of job holders, students and households are willing to invest their money in some extra sources other than their regular business and they found internet most convenient source for this purpose. They invest and work for projects like ads posting etc. where they invest as well as work but this could be source where they only invest and get money out of their investment. Just a bit spicing is required to increase the curiosity of crowd as Pakistani population is always trying new things whenever they are exposed to any. This platform could bring more radical and fast developments in society. People would be more interested in contributing for business projects if major game players start using this channel. Crowdfunding has changed the financial models in many developed states and it is now been also used as equity markets. Another reason for which people are not investing through this platform is because of the lack of Government’s appreciation and interest towards crowdfunding, which has increased the risk for investing in such projects. In Pakistan and South Asian countries the crowdfunding is mostly used for social causes, which is only bringing in the donors not the investors. From our research we have found out that people are willing to invest if the entrepreneurs from their country could bring up on their own projects. Despite all these many investors have started to invest in projects outside their regional boundaries and they are getting good returns out of it.
Crowdfunding could gain success in Pakistani markets if the knowledge about it is spread among the investors. The target of crowdfunded projects is everyone who is saving some portion of his/her income. These projects don’t require only one person to invest the whole project but it is whole crowd who is going invest with a very reasonable amount of investment. This platform could be more fruitful if the Government of Pakistan pays proper attention to it and pass some regulations to protect the investors. Most people consider online projects as frauds so to make it more interesting the project initiators should bring in some guarantor so that to gain the trust of investor.

References
Allison, T. H., Davis, B., & Short, J. (2014). Crowdfunding in a prosocial micorlending environment .
Belle , P., Lambertz , T., & Schwienbacher, A. Crowdfunding: An Industrial Organization Perspective. Digital Business Models: Understanding Strategies.
Bretschneider, U., Knaub, K., & Wieck, E. MOTIVATIONS FOR CROWDFUNDING: WHAT DRIVES THE CROWD TO INVEST IN START-UPS? Twenty Second European Conference on Information Systems. indiegogo. (2012). Retrieved from scribd.com: www.scribd.com/indiegogo
Mitra , T., & Gilbert, E. (2012). The Language that Gets People to Give:.
Mitra, T., & Gilbert, E. (2013). The Language that Gets People to Give:Phrases that Predict Success on Kickstarter. 5-7.
Ordanini , A., Marta , L. M., & Par, P. (2011). Crowd‐funding: transforming customers into investors through innovative service. Journal of service management .
Ordanini, A., Miceli, L., & Pizzete, M. (2011). transforming customers into investors through innovative service. Emerald , 10-20.
Schwienbacher, A. L. (2012). Crowdfunding of small entrepreneurial ventures. The Oxford Handbook ENTREPRENEURIAL FINANCE . wikipedia/crowdfunding. (n.d.). Retrieved from www.wikipedia.org: http://en.wikipedia.org/wiki/Crowdfunding

Appendix (interview guide)

* While investing in a crowdfunded project (online investing opportunity), what are the basic guidelines you follow?? * For the very first time when invested in any crowd funded project what were the basic drivers for investing in that project?? * Whenever investing does you prefer to invest within your geographic region’s boundaries, or do you prefer to invest in any project that seems feasible to you? * Do you believe in creating a balance in the society and giving something back to society or you just prefer to invest in the projects that offer good return?? Or do you just prefer to invest in the project of people who you feel are somehow related to you or related to your field of work?? * What type of projects do you like to invest in (either the ideas which are preferred by the society and brings a recognition in the society or do you just like to invest in the unique and new projects that seems to be fruitful?? * Sometimes it happens that you are in need of some item that is currently too much expensive or unavailable and there is some crowdfunded project that is offering to produce the same product, regardless of the geographic boundaries, would you invest in that project?? * Do you prefer the idea of the project and what it has to offer or do you prefer the team that has bring up the idea??