crowdfunding Flashcards
what are the two major ways for private firms to raise equity?
Venture capitalist (VC)
initial public offerings (IOP)
what are the benefits and costs of VC
Benefits of VC:
> Venture capital firm = limited partnership, specialised in raising capital to invest in young firms
> Benefits for VC limited partners vs. Angel investors
- more diversification
- expertise of general partners
Costs of VC:
> 2% management fee of committed capital
> 20% of positive returns
IPO can be determined by fixed price offer, what is this and what are the risks associated?
price is set, prospectus sent out and offers received
Risks:
- price is too high (uncertainty for issuer)
- price too low ( money “left on the table”)
- underwriting costs
IPO can be determined by book building, what does this consist of, explain
it consists of open pricing, or constrained open pricing
open pricing:
- bids taken from market
- final price is a clearing price that issues all shares
constrained open pricing:
- investors invited to bid for shares within a predetermined price range
- the final issue price determined by the level of investor demand
what is a rare way to price IPOs
through auction:
eg- underwriter in auction IPO takes bids from investors and then sets the price that clears the market.
what are the roles of an underwriter in auction of IPO
underwriter in auction IPO takes bids from investors and then sets the price that clears the market.
Underwriter guarantees success of issue:
Role of underwriter in capital raising process:
* Principal role is guarantee success of issue
* 2 Types: “Firm commitment” vs. “best efforts”
* Underwriters are investment banks and stockbroking firms
Other roles of underwriter include:
- recommend issuing method + value securities
Fulfils insurance function:
- underwriter beats risk if the issue is not fully subscribed
- => underwriting risk = risk of shortfall
Underwriter costs are hing and not very sensitive:
* A typical spread is 7% of the issue price
what are some examples of crowdfunding
- Indiegogo 2008
- Kickstarter 2009
- Gofundme 2010
what is crowdfunding?
Definition Crowdfunding:
* “Form of capital raising whereby groups of people pool money, typically comprised of very small individual contributions, to support an effort by others to accomplish a specific goal.”
* Online peer-to-peer, crowd-lead marketplaces that are open at least partially to individual retail investors (the “crowd”)
what are 3 types of crowdfunding models
reward based
equity based
Debt based
describe reward based crowdfunding
Typically, pre purchase and rewards are combined
Reward funding models
* Pre purchase (receive products or right to buy at reduced price)
* Rewards ( conditional on $-backing) , (eg. “thankyou” card, name listed on website, T-shirt, invitation to event, combo pack, work with creator, ect)
Two reward models exist but KIA most common:
what are the advantages and disadvantages of reward based crowdfunding
Advantage:
* Compared to traditional finance, no dilution for founder
Disadvantage:
Greater transparency may mean theft and is costly
As a reward crowd-funder, no cash flow rights
what are the two types of debt based crowdfunding
market place lending
Peer-to-peer (P2P) lending
what are the two types of debt based crowdfunding
market place lending
Peer-to-peer (P2P) lending
who benefits from crowdfunding
Providing small firms financing can enhance innovation
Access to finance - Gov R&D subsidies:
* Gov subsidies to small firms could be good or bad
US department of energy small business innovation research program, phase 1 awards:
* Double probability of firm receiving VC funding
* Double probability of positive revenue
* Increased probability of survival and successful exit
* More useful for hardware firms which require greater upfront capital (more financially constraint)
Access to investments must also protect investors
Screening and fraud prediction:
* With subsidies, gov is doing screening
* Quality of screening on crowdfunding platforms?
* Evidence suggests that crowdfunding fraud related to:
- entrepreneurs characteristics
Social media affinity
Campaign funding and reward structure
Campaign description
