crowdfffffffffffffffucking 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.
Typical problems in start up funding;
- Adverse Selection:
Entrepreneurs know more about the project than investors - Moral Hazard_
Entrepreneur goes crazy in risky projects after getting funded
Q: Explain the peer-to-peer finance model
Individuals can directly invest in businesses
Q: Pros of P2P finance
- Democratizes finance
- Low barrier to entry
Q: Cons of peer-to-peer
High search-and-match costs (can be hard to find the right investors)
Information problems (investors may lack information, leading to high-risk investment)
Q: What is the Financial Markets Model?
equity crowdfunding, where investors receive a stake in the company.
Q: Pros of Financial Markets Model
- Offers potentially high returns if the project or business succeeds.
- Provides liquidity as shares can often be sold
Q: Financial Intermediation Model
Platforms acting as intermediaries to facilitate transactions between funders and those seeking funding.
Q: Pros of Financial Intermediation Model
Platform helps mitigate agency problems.
Q: Cons of Financial Intermediation Model
Costly: Platforms will charge fees
Platform can have its own motives
Q: Adverse Selection problem 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?
Rise of digital platforms, such as crowdfunding and initial coin offerings (IOC)
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.
Q3: What is the primary role of financial intermediaries in the financial intermediation model?
To reduce agency problems through screening and monitoring, benefiting from economies of scale.
Q4: What challenges do start-ups face when seeking traditional funding?
A: Start-ups face high uncertainty, adverse selection, moral hazard, and credit rationing. They’re perceived as riskier, have less collateral, little or no history, and are less resourceful.
Q5: What are some recent innovations in start-up financing?
A: Digital platforms have emerged that connect start-ups with potential investors, bypassing traditional intermediaries. Examples include crowdfunding and initial coin offerings (ICOs).
Q6: How does disintermediated finance differ from intermediated/traditional finance?
A: Unlike traditional finance, disintermediated finance doesn’t rely on intermediaries. Each investor individually decides which projects to support.
Q7: What is the “long tail” concept in the context of disintermediated finance?
A: The “long tail” refers to catering to niche demands, not just mainstream ones. Crowdfunding and ICOs leverage this by aggregating the demand for risky investments by individuals.
Q8: Why are banks not the best source of finance for startups?
A: Banks are not natural risk-takers and tend to finance only very safe firms. Stricter regulations after the financial crisis have further limited lending to smaller firms.
Q9: What does the term “smart money” mean?
A: “Smart money” refers to investment by those seen as experienced, informed, and well-advised, implying that they can offer more than just funds, such as expertise or networks.
Q10: Why is venture capital (VC) highly selective?
A: VC firms are good at screening out bad firms and typically seek high-growth companies with a proven model, limiting their investments to a very small proportion of start-ups.
Q12: What is credit rationing?
Lender limits amount of credit to borrowers. Often due to Information asymmetry.
Q15: How has technological advancement affected startup financing?
A: Tech advancement have made it easier to establish digital platforms that connect startups with potential investors, bypassing traditional intermediaries.
Q17: What is an Initial Coin Offering (ICO)?
A: ICO is a type of crowdfunding using cryptocurrencies. A startup entity offers investors some units of a new cryptocurrency (or crypto-token) in exchange against cryptocurrencies like Bitcoin or Ethereum.
Q19: Why is the financial intermediation model advantageous for established firms?
A: Financial intermediaries provide services such as screening and monitoring that reduce agency problems. They also allow economies of scale, which is beneficial for larger, established firms.
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: 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 crowdfunding?
A: Crowdfunding is raising capital for a cause or business venture by asking a large number of people to make small investments or donations, typically via online platforms.
Q: How has crowdfunding impacted the start-up funding landscape?
Allowed for more capital thus more entrepreneurs and projects
Q: Does the improvement in financing lead to more success for start-ups?
Give them better chances, but business plan must still be good
Q: How can disintermediate finance reduce the funding gap of start-ups?
By providing direct access to a larger pool of investors and bypassing traditional intermediaries.
Q: When did modern-day crowdfunding begin?
1997
Q: What is Kickstarter
One of the largest rewards-based crowdfunding platforms
Q: How does Kickstarter work?
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.
• “all or nothing” – if the funding goal is not met by the deadline, the project does not receive any funding
Q: What types of rewards are commonly offered in crowdfunding campaigns?
Generate capital by avoiding loans
Q: What is equity-based crowdfunding?
Individuals invest in the company and get a small amount of equity (ownership) in that company.
Q: What is the priority of equity in a firm’s future cash flows in case of default?
Equity has the lowest priority. This makes heightened “information asymmetries.”
Q: What regulation was signed into law in the US to encourage funding of small businesses through crowdfunding?
A: The Jumpstart Our Business Startups (JOBS) Act was signed into law in 2012 in US to ease regulations and encourage funding for small businesses
Q: What are some benefits of equity crowdfunding?
Provides liquidity as shares can often be sold
Wisdom of the crowd: many potential investors, with broad knowledge
Q: What are some issues associated with equity crowdfunding?
- Potential information asymmetries
- Investor free-rider problem
- Limited control
Q: What is Peer-to-Peer (P2P) lending?
A: P2P lending, also called crowdlending or loan-based crowdfunding, involves online platforms that match loans with lender interest. It includes consumer lending, business lending, and property lending.
Q: What are the factors that led to the rise of P2P lending?
tech advancements like AI, mahine learning and big data
Q: What is reintermediation in online lending?
A: Reintermediation occurs when decentralized online lending markets, like Prosper Marketplace, introduce intermediaries who perform tasks related to loan evaluation, including loan screening and pricing.
Q: How does reintermediation mitigate moral hazard and adverse selection in P2P lending platforms?
- Mitigating Moral Hazard:
Moral Hazard is the risk that borrowers undertake risky projects. Reintermediation helps this as it introduce active investors or lenders who actively participate in the lending process.
Active = those who monitor more - Mitigating adverse selection
Pooling different types of investors togethers and randomly allocate loans
Q: What are the main ways that crowdfunding platforms make money?
through different fees
Q: What are some factors that have contributed to the rise of P2P lending?
- Financial innovation aimed at reducing
a) transaction costs
b) information asymmetry - Technological advancements
a) Like AI, blockchain
Q: How does Prosper mitigate the adverse selection problem between passive and active investors?
A: Prosper allocates loans randomly to separate pools for active institutional investors, passive institutional investors, and retail investors, reducing the impact of active investors on the loan quality available to passive investors.
Q: Can you provide an example of moral hazard in P2P lending?
Borrowers getting more risky after funding
Q: How do interested investors participate in an ICO? How do they invest in it
A: Interested investors can buy tokens in the ICO using either fiat currency or preexisting digital tokens like Bitcoin or Ether
Q: What happens to the tokens after an ICO?
A: After the ICO, the tokens are usually listed on online exchanges, providing liquidity for token-holders and indicating the quality and future prospects of the platform.
Q: What are some reasons for the rapid increase in ICOs?
New tech like blockchain has made it more efficient
Q: What is the main disadvantage of equity in crowdfunding?
Equity has the lowest priority over a firm’s future cash flows in case of default. It is more information-sensitive than debt, leading to heightened “information asymmetries”.
Q: How do crowdlending platforms like Lending Club work?
A: Platforms like Lending Club offer personal loans and follow a standard lending procedure. The borrower applies for a loan, provides personal and financial details, the platform evaluates the application, and if approved, investors fund the loan.
Q: What do you mean by reintermediation of online lending platforms?
A: Initially, many online lending platforms were purely decentralized, facilitating interactions between borrowers and lenders. Reintermediation refers to the process where these platforms have reintroduced intermediaries to perform tasks like loan evaluation, screening, and pricing.
Q: What is an Initial Coin Offering (ICO)?
A: An ICO is the cryptocurrency industry’s equivalent to an IPO. Companies issue branded tokens to raise capital for an online platform or ecosystem. These tokens can later be listed on online exchanges.
Q: What are some reasons for the rapid increase in ICOs during 2017-2018?
Disintermediated nature of blockchain technology
efficiency, transparency, safety
Q: How can fintech firms pose a threat to incumbent banks?
A: By offering more convenient payment solutions, turning soft personal data into hard information, and providing quicker, more tailored advisory services, fintech firms can undermine key revenue sources and the information franchise value of banks.
Q: What is the critical advantage that banks have over fintechs?
Banks have the privilege of private money creation through deposit accounts.
What are the three scenarios for European banking in 2030
1) Incumbent banks continue to dominate through technological adaptation and acquisitions.
2) Incumbent banks retrench as big techs offer financial services through regulated subsidiaries.
3) Issuance of retail central bank digital currencies leads to a very different structure of the financial system.
Q: What are some more recent fundraising forms on blockchain-based platforms?
- Initial Exchange Offering (IEO)
- Initial DEX Offering (IDO)
Q: What threats do banks face from new technology and capital markets?
Banks face competition from tech giants developing payment systems and the possibility of digital payments replacing cash.
Q: What distinguishes money and banking from other industries affected by technology?
- Money and banking serve as the interface between the state and the economy, playing a critical role in the monetary system.
- The underlying architecture of banking has remained largely unchanged for centuries.
Q: What are some competitive threats faced by incumbent banks?
- Fintech firms can do much as the same as banks
Q: What advantage do traditional banks have?
They print the money
Q: How do banks typically view fintech firms and big tech companies?
Generally not as direct threats.
Often collaborate to get some of big techs advantages (data analytics, network externalities etc)
Q1: What are the drawbacks of the peer-to-peer finance model?
A: High search-and-match costs, information problems, and severe agency problems limit its scale, usually to within close circles like friends and family.
Q2: What are the advantages of the financial markets model?
A: Regulations and standardized securities mitigate agency problems. This model provides high liquidity and operates at a large scale.
Q3: What is the primary role of financial intermediaries in the financial intermediation model?
A: They reduce agency problems through screening and monitoring, benefiting from economies of scale.
Q4: What challenges do start-ups face when seeking traditional funding?
A: Start-ups face high uncertainty, adverse selection, moral hazard, and credit rationing. They’re perceived as riskier, have less collateral, little or no history, and are less resourceful.
Q8: Why are banks not the best source of finance for startups?
A: Banks are not natural risk-takers and tend to finance only very safe firms. Stricter regulations after the financial crisis have further limited lending to smaller firms.
Q9: What does the term “smart money” mean?
A: “Smart money” refers to investment by those seen as experienced, informed, and well-advised, implying that they can offer more than just funds, such as expertise or networks.
Q11: Why does crowdfunding and ICOs appeal to startups?
A: These methods make it easier for startups to receive financing by aggregating individual investors’ demand for risky investments, enabling niche and mainstream projects alike.
Q12: What is credit rationing?
A: Credit rationing occurs when lenders limit the supply of additional credit to borrowers who demand it, even if the latter are willing to pay higher interest rates. It’s often due to information asymmetry between lenders and borrowers.