b. Effects of crowd funding on business
This paper seeks to cover the following points in regards to crowdfunding;
The definition of crowdfunding in relation to business start ups
The goals and objectives of both funders and founders of an entrepreneurial venture to trigger crowdfunding financing.
The benefits and negative effects of crowdfunding
The current regulation related to crowdfunding in the US and the world at large
Possible future direction that crowdfunding should take in order to prevent possible scams
Crowdfunding Financing Analysis & Its Effects on Start-up Businesses
Gaynor, G., C.P.A., Morse, J., &Pevzner, M., C.P.A. (2015). The CROWD-FUNDING EFFECT. Strategic Finance, 97(4), 35-39.
The article notes that the US SEC has finally come up with a framework that seeks to allow individual investors and corporations at large to invest with a company’s stock without having to adhere to some of the old and conventional rules and regulations that oversee publicly traded securities as a whole. The Jumpstart Our Business Start-ups (JOBS) Act, has allowed businesses in the process of going public with an imminent opportunity to do so without so much constraints. It is noted that under Title III of the Act, specific provisions have now allowed businesses to engage in a government-sanctioned crowdfunding and, also has ensured to formulate a regulatory structure for both start-ups and small businesses to foster internet-based trading settings that permit securities transactions without having to rely on registration with SEC or even brokers or dealers.
According to Gaynor, Morse and Pevzner (2015), crowdfunding has benefited small start ups especially since it permits for small investments from less sophisticated investors as well as sales through numerous online-based structures. Unlike in the traditional model, now it is argued that small business can attain a higher liquidity of their immediate stocks while entrepreneurs that might have been sidelined by the need for attaining a high equity interest in the course of raising capital can now access it easily. It is also likely to foster macroeconomic benefits since it has an imminent potential to grow the economy while at the same time possibly decrease level of dynamism. To investors, crowdfunding could possibly foster investor-related education and an active stock market participation process.
The authors further argues against the financing model in that it possess a high risk especially when there is a potential for hacking resulting to loss of important data and investments. Consequently, it is noted that crowdfunding might result to additional liquidity risk given that there might lack of secondary market for crowd funded shares thereby prompting owners sell at huge discounts.
Crowd funding alternative: Why small businesses owners & entrepreneurs prefer funding through business angel investors. (2014, Oct 22). PR Newswire
The article notes that there has been a significant increase in the number of businesses looking for ways of coming up with investments for their businesses. A study conducted by Venture Giant notes that there have been almost 1000 registered users of the crowdfunding platform. A huge number of potential business angel investors prefer the new internet-based funding option despite the current challenging economic times due to high returns. It is argued that the immediate use of business angels certainly allows for investment of monies into businesses as well as their extensive level of expertise. The article further notes that entrepreneurs have continued to benefit from the willingness of business angel investors with important advices in relation how business position should be executed and future profitability potential.
The article notes that; ‘Investment capital is just about everything for an entrepreneur but an investor’s experience, contacts and mentoring can make all the difference to a start-ups success of failure'(Crowd Funding Alternative: Why Small Businesses Owners & Entrepreneurs Prefer Funding Through Business Angel Investors, 2014).
Korporaal, G. (2014, Sep 03). CROWD FUNDING A NEW FRONTIER, Australian edition]. The Australian
Korporaal (2014) notes that potential investors should always take precautions whenever engaging in crowdfunding finance option. A case provided showing the successful financing process is that of THE Brisbane-based hairdressing magazine Culture that managed to secure more than $200,000 and made contributions to the numerous investors like having access to free copies of the re-launched magazine and honour rolls for major contributions. In Australia, the crowdfunding has fostered the promotion of new movies and short films. Recently, Pozible has expanded to such other notable markets as China where it has successfully facilitated funding for smart fitness businesses like Gyennno One. It is noted that in the United States of America, the astute use of small sized mass market funding resulted to Barack Obama’s re-election bid meaning that fundraising through the use of social media platforms continues to gain sheer momentum. Given the universal nature of crowdfunding, even Australian-based businesses can now contribute to programs launched in the US-based Kickstarters among others. The article notes that just like successful stories presented by such tech-companies like Uber; crowdfunding has penetrated boarders where new entrants do not require permission for entrance. However, it also warns against possible scams that might come with the activity. It is noted;
«There are crowd-funding businesses that are literally just scams. What they promise is impossible, but normally no one realises until it is too late» (Korporaal, 2014).
Mollick, E. (2014). The dynamics of crowdfunding: An exploratory study. Journal of business venturing, 29(1), 1-16.
The article posits that crowdfunding operates on a set of dynamics that are both successful and failures in nature. It is suggested that such aspects individualized networks and, also underlying project quality are attributed to the success emanating from the crowdfunding efforts while the geographical concept of the model is linked to the enormous levels of founders that seek to accomplish their goals to funders however; more than 75% of them deliver low-quality products; with a distinctive degree of delay in regards to the degree and amounts of funding involved.
Belleflamme, P., Lambert, T., & Schwienbacher, A. (2014). Crowdfunding: Tapping the right crowd. Journal of Business Venturing, 29(5), 585-609.
This article notes that crowdfunding allows entrepreneurs to raise external financing from a larger set of people for which each of the individual people within the group provides a small amount of money without going for sophisticated investors. Belleflamme, Lambert and Schwienbacher (2014) provides arguments for two forms of crowdfunding options; whereby entrepreneurs solicit people for purposes of pre-ordering a certain product or for the sole purpose of extending their fixed amounts for money in exchange for definite share of future returns. It ascertains that crowd-funders achieve significant level of success since they enjoy extensive forms of community benefits that promote their utility aspect. The authors presume that in a unified model; entrepreneurs would always prefer to engage in a pre-order in the event that the initial capital amounts are considered to be smaller with market size and opt for profit sharing instead.
Valanciene, L., & Jegeleviciute, S. (2013). Valuation of crowdfunding: benefits and drawbacks. Economics and Management, 18(1), 39-48.
Valanciene and Jegeleviciute (2013) note that despite crowdfunding growing tremendously over the years there are still issues that might result to underestimation of the model thereby resulting to missed opportunities. The authors notes that crowdfunding permits an opportunity to test the marketability aspect, easier access to capital while its core weaknesses arise whenever investor protection from fraud is deemed imminent and its internet-based nature might limit investors from accessing pertinent advice.
Prior to reading the research articles, I was of the opinion that crowdfunding is somehow risky in nature and might result to potential investors losing money on fraudulent activities, however; after reading extensive literature, I have realised that the entire process is protected by certain regulations like the JOBS Act. I have also learned that the activity does not limit one from raising capital for their different ideas hence a chance to attract high commission free resources than other forms of traditional financing options.