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.
