accessing alternative financing: an introduction to ...crowdfunding basics crowdfunding vs. angel...
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Introduction Donations and Rewards Lending-based CF Equity-based CF Conclusion
Accessing Alternative Financing:An Introduction to Crowdfunding
Ivan Ivanov1
Board of Governors of the Federal Reserve System
07/22/2014
1The views stated herein are those of Ivan Ivanov and are not necessarily theviews of the Federal Reserve Board or the Federal Reserve System.
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Introduction Donations and Rewards Lending-based CF Equity-based CF Conclusion
Crowdfunding Basics
What is crowdfunding?
“The practice of funding a project or venture by raising manysmall amounts of money from a large number of people,typically via the Internet.” Oxford Dictionaries
Affected Market Participants
Entrepreneurs and small businesses
Funders, typically retail investors
Crowdfunding platforms
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Introduction Donations and Rewards Lending-based CF Equity-based CF Conclusion
Crowdfunding Basics
Crowdfunding vs. Angel and VC Investing
Angels and VCs to a large part sophisticated investors.
Crowdfunding has the potential to alleviate funding contraintsfor small businesses and help fund profitable projects that areleft out by angels and VCs.
Types of Crowdfunding
Donations- and Rewards-based
Lending-based
Equity-based
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Introduction Donations and Rewards Lending-based CF Equity-based CF Conclusion
Donations- and Rewards-based Crowdfunding
Donations-based Crowdfunding
Funders – philantropists, believe in the idea/venture ratherthan expecting a return on their investment.
Entrepreneurs often have humanitarian goals.
Entrepreneurs retain complete control.
Rewards-based Crowdfunding
Funders receive a sample of the product if the entrepreneursucceeds.
Rewards examples: a free ticket to a movie or a concert, a freeor a discounted music CD, a T-shirt.
Entrepreneurs retain complete control.
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Introduction Donations and Rewards Lending-based CF Equity-based CF Conclusion
A Donations-based Crowdfunding Example
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2source: Indiegogo.com5
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A Rewards-based Crowdfunding Example
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3source: Kickstarter.com6
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Introduction Donations and Rewards Lending-based CF Equity-based CF Conclusion
Do Rewards-based CF Projects Succeed?
Mollick (2014) studies artistic projects fromKickstarter and finds:
Half of the posted projects raise at least the goal amount.
Successful projects succeed by a narrow margin.
Unsuccessful projects fail by a wide margin.
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Failed Projects, Mollick (2014)
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Successful Projects, Mollick (2014)
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Introduction Donations and Rewards Lending-based CF Equity-based CF Conclusion
Lending-based Crowdfunding
Key Characteristics
Lenders may or may not have monetary incentives: for-profitand philatropic lending-based crowdfunding.
For-profit lending
Portals rate loans based on FICO scores, conduct veriricationof borrower information.
Investors observe ratings and borrower information and chooselending according to their risk preferences.
Philantropic lending: funds distributed to entrepreneurs bylocal micro-finance institutions that might charge interest.
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Introduction Donations and Rewards Lending-based CF Equity-based CF Conclusion
Lending-based Crowdfunding
Selected Statistics
Lending Club: approximately $5 Billion in loans since 2007.
Prosper: approximately $1.4 Billion in loans since 2005.
KIVA: repayment rate for the $587 million lent through KIVAapproximately 99%.
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For-profit lending-based CF
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4source: Prosper.com12
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Philantropic lending-based CF
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5source: zip.kiva.org13
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6source: zip.kiva.org14
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Introduction Donations and Rewards Lending-based CF Equity-based CF Conclusion
Equity-based Crowdfunding
Equity crowdfunding offerings: entrepreneurs sell shares ofstock directly to atomistic investors on an Internet platform.
Currently conducted abroad but a minor portion of the overallcrowdfunding market.
Collins, Swart, and Zhang (2013): the UK equity-basedcrowdfunding amounted to only GBP28 million out of a totalcrowdfunding market exceeding GBP940 million.
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Introduction Donations and Rewards Lending-based CF Equity-based CF Conclusion
Equity-based Crowdfunding in the US
Regulation Crowdfunding proposed by the SEC on October23rd , 2013 but not adopted yet.
Once adopted, start-ups could sell equity shares directly to thepublic, subject to certain limits.
Three proceeds buckets: less than $100,000, between 100,000and $500,000, and between $500,000 and $1,000,000.
Disclosure requirements vary depending on offering proceeds.
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Introduction Donations and Rewards Lending-based CF Equity-based CF Conclusion
Concluding Remarks
Crowdfunding has the potential to transform the capitalacquisition process for entrepreneurs and small businesses.
These trends could be particularly relevant to minorities.
CBInsights 2010 report: “87% of all VC-backed Founders areWhite.”
Raising capital from sophisticated investors: Reg D and RegA/A+.
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