crowdfunding 222222 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.
Q: Explain the peer-to-peer finance model
Individuals can directly invest in businesses
Q: Pros of P2P finance
- Democratizes finance
- Allows projects/businesses to get finances that might not be possible through traditional means.
Q: Cons of peer-to-peer
- High search-and-match costs: It can be challenging to find the right investors for your project or to find projects you want to invest in.
- Information problems: Investors may lack the necessary information to make an informed decision, resulting in potentially higher-risk investments.
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: Cons of Financial Markets Model
- High fixed costs: There may be significant administrative and regulatory costs associated with equity crowdfunding.
- Risks associated with equity investment, including the potential loss of the entire investment
Q: Financial Intermediation Model
Platforms acting as intermediaries to facilitate transactions between funders and those seeking funding.
Q: Pros of Financial Intermediation Model
- Reduces agency problems: The platform does some level of evluation and provides a certain degree of protection to investors.
- Provides a convenient and centralized location for crowdfunding activities.
Q: Cons of Financial Intermediation Model
- It is costly: Platforms often charge a fee for their services, which reduces the total funds received by the project or business.
- There can be potential misalignment of interests between the platform, investors, and those seeking funding.
Q: Two typical problems in start-up funding
Adverse selection and Moral Hazard
Q: Adverse Selection in Start-up funding
Hard to distinguish between good/bad entrepreneurs. Only a few good. Hard to find, might not invest at all -> credit rationing
Q: Moral Hazard in Start-up funding
After entrepreneur gets money, might go for risky project -> 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.
