10. Crowdfunding Flashcards
Q: What are the traditional models of finance for raising funding?
a) Peer-to-peer finance
b) Financial markets model
c) Financial intermediation model.
Q: What are the pros and cons of the traditional models of finance?
a) The peer-to-peer finance model faces high search-and-match costs and information problems.
b) The financial markets model offers high liquidity but has high fixed costs.
c) The financial intermediation model reduces agency problems but is costly.
Q: Two typical problems in start-up funding
Adverse Selection and Moral Hazard
Q: Adverse Selection in Start-up funding
Investors and lenders cannot distinguish between good and bad entrepreneurs/products. With only a few good firms in the market, investors/lenders will have problems finding them and may not invest or lend -> credit rationing
Q: Moral Hazard in Start-up funding
After financing, an entrepreneur might take steps that are not in the investor/lender’s best interests. May chose risky project instead of safe. The lender may refuse to lend because of the entrepreneurial firm’s limited liability -> credit rationing
Q: What major innovations have occurred in start-up financing in the past decade?
A: The rise of digital platforms, such as crowdfunding and initial coin offerings (ICOs), has made it easier for start-ups to connect with potential investors, bypassing traditional intermediaries.
Q: Why have banks reduced lending to smaller firms?
A: Stricter regulations following the financial crisis have led banks to cut down on lending to smaller firms.
Q: How does disintermediated finance differ from traditional finance?
A: Disintermediated finance allows individual investors to make investment decisions directly, rather than relying on intermediaries.
Q: What is crowdfunding?
A: Crowdfunding is the practice of raising capital by asking a large number of people to make small investments or donations through online platforms.
Q: What are the three main types of crowdfunding? (+1)
a) Reward- and donation-based crowdfunding
b) Debt-based crowdfunding (P2P lending)
c) Equity-based crowdfunding.
* Initial Coin Offerings (ICOs) is also a type of crowdfunding, based on blockchain technology.
Q: What is P2P lending in the context of crowdfunding?
A: P2P lending, or peer-to-peer lending, is a type of crowdfunding where individuals lend money to borrowers directly through an online platform, bypassing traditional financial intermediaries.
Q: What is equity-based crowdfunding?
A: Equity-based crowdfunding allows investors to buy shares or equity stakes in a start-up or business venture in exchange for their investment.
Q: What is Reward- and donation-based crowdfunding?
A: Reward- and donation-based crowdfunding is a type of crowdfunding where individuals contribute funds to a project or cause without expecting financial returns, but instead receive non-financial rewards or simply donate to support the cause.
Q: What is an Initial Coin Offering (ICO)?
A: An Initial Coin Offering (ICO) is a type of crowdfunding based on blockchain technology, where cryptocurrencies are offered to investors in exchange for funding start-up projects.
Q: When is crowdfunding typically used?
A: Crowdfunding is used when raising capital for a cause or business venture, typically for start-ups or projects seeking funding.
Q: What is the “long tail” in this context?
The “long tail” concept refers to a statistical pattern where the frequency distribution of products or services follows a long, shallow tail instead of a steep decline. In the context of crowdfunding, it means that instead of focusing solely on popular or mainstream projects, crowdfunding platforms enable the financing of a wide variety of niche or specialized projects that cater to specific interests or markets.
Q: How has crowdfunding impacted the start-up funding landscape?
A: Crowdfunding has democratized access to capital, allowing a wider range of entrepreneurs and projects to seek funding and potentially disrupting traditional funding channels.
Q: Do the new forms of start-up funding make it easier to receive financing?
A: Yes, the new forms of start-up funding, such as crowdfunding and initial coin offerings (ICOs), provide alternative channels for start-ups to access financing and have made it easier for them to raise capital.
Q: Does the improvement in financing lead to more success for start-ups?
A: While improved financing options can enhance the chances of success for start-ups, success is still dependent on various factors beyond funding, such as the quality of the business model, market demand, management capabilities, and execution.
Q: Can disintermediate finance reduce the funding gap of start-ups?
A: Disintermediated finance, through platforms like crowdfunding, has the potential to reduce the funding gap for start-ups by providing direct access to a larger pool of investors and bypassing traditional intermediaries.
Q: When did modern-day crowdfunding begin?
A: Modern-day crowdfunding began in 1997.
Q: What is rewards-based crowdfunding?
A: Rewards-based crowdfunding involves individuals donating to a project or business with the expectation of receiving non-financial rewards, such as goods or services, in return.
Q: What are the benefits of using rewards in crowdfunding?
A: Using rewards in crowdfunding allows entrepreneurs to test product demand, create visibility through marketing, provide additional financing alongside traditional sources, and allocate capital efficiently in the face of demand uncertainty.
Q: What is Kickstarter?
A: Kickstarter is one of the largest rewards-based crowdfunding platforms that helps tech and creative entrepreneurs fund their projects.
Q: How does Kickstarter work?
A: Entrepreneurs create a webpage explaining their project, set a funding goal and deadline, and must reach their goal within the specified time to receive the funds. Kickstarter operates on an “all or nothing” basis.
Q: What types of rewards are commonly offered in crowdfunding campaigns?
A: The most common reward types include copies of the actual product, creative collaborations, creative experiences, and creative mementos.
Q: Why might a company choose equity-based crowdfunding?
A: A company might choose equity-based crowdfunding as a way to generate capital for growth, avoiding loans or the challenges of finding angel investors.
