Lecture 6 Flashcards
What are some methods of equity financing for unlisted companies?
- Angel investors
- venture capital
- institutional investors
- corporate investors
- IPO (listing shares for the first time)
What are some methods of equity financing for listed companies?
- Private placement - to small group of investors
- Dividend reinvestment plan - instead of div, get shares
What is the difference between a listed and unlisted firm?
Listed means they have debt securities listed on stock exchange, unlisted companies do not
What are the 2 major ways private companies can raise equity?
venture capital and IPO’s
What is a venture capital firm?
Limited partnership, specialized in raising capital to invest in young firms
What are the benefits of VC? (2)
- more diversification
- expertise
What are the costs of VC?
- 2% management fee on committed capital
- 20% of positive returns
How is offer price determined for an IPO?
Fixed price offer or book building
What is a fixed price offer?
Price is set, prospectus sent out and offers received
What are the potential risks of a fixed price offer?
- price to high = uncertainty for issuer
- price too low = money “left on the table”
What are the 2 types of book building?
Open pricing and constrained open pricing
What is open pricing?
Bids taken from the market, final price is a clearing price that issues all shares
What is constrained open pricing?
Investors invited to bid on shares in a pre determined price range. Final price determined by investor demand
What is the main role of an underwriter?
Buy all shares from a company and sell themselves, bear the risk
What are the other roles of an underwriter?
- recommend issuing method
- Value securities
What were the first examples of crowdfunding?
- 1997 Marillion
- 2000 Brian Camelio “artistshare”
- 2009 kickstarter and others
- 2011 patent law suit, artistshare vs kickstarter
What is crowdfunding?
Form of raising capital whereby groups of people pool money to support others complete a specific goal
How does crowdfunding act as a form of financial intermediation?
- access to entrepreneurs
- Community participation
- access to products
- Low- cost format contract
- Returns (equity, debt)
How do platform intermediaries act as financial intermediaries?
- standardize contact at standardized fee
- mitigate information problems
- match investors and entrepreneurs
- analysis of companies (Due dilligence)
How do entrepreneurs act as financial intermediaries?
- access to investors
- low cost of capital compared to others
- Advice from platforms
- info about demand of product
- loss of secrecy/ publicity
What are the characteristics (Contribution, return and motivation) of debt-based/ P2P lending?
- contribution - Loan
- return - repayment of loan
- Motivation - financially driven
What are the characteristics (Contribution, return and motivation) of equity based crowdfunding?
- contribution - investment
- return - financial/ material rewards
- Motivation - financially driven
What are the characteristics (Contribution, return and motivation) of reward based crowdfunding?
- Contribution - Donation/ presell
- return - material/ non financial rewards
- Motivation - intrinsic (satisfaction), social and rewards
What are the characteristics (Contribution, return and motivation) of donation based?
- Contribution - donation
- Return - non-financial and intangible benefits
- Motivation - intrinsic, social and affinity based
What are the 2 rewards based crowdfunding models and what are they?
- pre purchase - receive product or right to buy at reduced price#
- Rewards - eg thank you card, invitation to event
What are the 2 types of reward funding recived?
- All or nothing (AON) - don’t receive money until target goal is reached
- Keep it all (KIA) - Keep whatever you receive
What are the advantages of crowdfunding for entrepreneurs?
- No dilution (no ownership given up)
- No financial obligations or penalties
- standardized contractual terms
- Feedback from investors/ future customers
Disadvantages of crowdfunding for entrepreneurs?
- plagiarism/ theft
- early publicity and failure could make future crowdfunding harder
- reporting and communication costs could be high
What do you receive in equity based crowdfunding?
Shares
What is the direct method in equity based crowdfunding?
Receive shares directly (become shareholder)
What is the nominee method in equity based crowdfunding?
Gives shares to a trust (organised by platform)
What is the co-investment method in equity based crowdfunding?
receive shares but VC invests with you
Is equity based crowdfunding usually AON or KIA?
AON
What are the governance issues with equity crowdfunding?
- adverse selection (are ventures high or low quality)
- Quality of platform screening
- Who is monitoring entrepreneurs post- funding?
How is equity crowdfunding legislation done in the UK?
Financial services and markets act - must be regulated by FCA to adhere to regulation
What are the 2 types of debt-based crowdfunding?
- marketplace - matches lenders and borrowers through online platforms
- P2P lending - direct relationship between borrowers and lenders
What does evidence suggest crowdfunding fraud is related to?
- entrepreneurs characteristics
- social media affinity
- Campaign funding and reward structure
- campaign description
what does crowdfunding increase the probability for for firms?
- receiving VC funding
- Positive revenue
- survival or successful exit
