Int Finance - Crowd Investing - Term Paper
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Transcript of Int Finance - Crowd Investing - Term Paper
Crowd investing - a new market for entrepreneurs and investors? 1
Contents
1 Introduction 2
2 Crowd investing - definition, tools, types & example 3
2.1 History: The evolution of the "crowd" 3
2.2 Definition, Types and tools 3
2.3 Similar forms of financing 5
2.4 Seedmatch - a short example 5
3 Critical analysis from entrepreneur's & investor's perspective 6
3.1 Entrepreneur's perspective 6
3.1.1 Advantages 6
3.1.2 Disadvantages 7
3.2 Investor's perspective 8
3.2.1 Advantages 8
3.2.2 Disadvantages 9
3.3 Problems & Questions 10
4 A typical project for crowd investing: Trampoline systems 11
5 Conclusion 12
6 Bibliography 13
Crowd investing - a new market for entrepreneurs and investors? 2
1 Introduction
A permanent problem that entrepreneurs face at the beginning of their entrepreneurial
starting period is to attract outside capital, due to the lack of collateral cash flows and the
presence of significant information asymmetry with investors.1 Refused by banks and with
the aim of getting people who believe in one, some entrepreneurs have startet to rely on the
internet to directly seek financial help from the general public ("the crowd") instead of
approaching financial investors such as business angels, banks or venture capital funds.
This technique, called "crowd funding" or "crowd investing", has made possible to seek
capital for project-specific investments as well as for starting up new ventures.
This term paper gives an overview on the history and the origin of the "crowd", the
correlation of "crowd sourcing", "crowd funding" and "crowd investing" and examplarily
dwells on the platform Seedmatch. It highlights advantages and disadvantages of investors
and entrepreneurs, further problems and questions and presents a typical and as well one
of the first crowd investing projects: Trampoline systems. Concluding, the term paper will
evaluate briefly both sides of crowd investing and will outline which kind of projects or
firms are most qualified for this new kind of raising money.
2 Crowd investing - definition, types & tools
2.1 History: The evolution of the "crowd"
The meaning of "crowd" can be found earlier in history as one will connect it with: Mozart
and Beethoven already financed his concerts and publications via advance subscriptions
from interested parties.2 The Statue of Liberty (*1886) in New York as well was financed by
small donations of American and French people.3 The student Alex Tew collected 1,037,000
USD between August 2005 and January 2006 by offering pixels 'for sale' to finance his
studies. The trade-off was the placement of advertisement banners on these pixel bought for
et least five years.4
1 Cf: Schwienbacher et al.: "Crowdfunding of small .." (2010), p. 3 2 Cf: Hyperion-records.co.uk (2012-05-09) 3 Cf: Wikipedia: Statue of Liberty 4 Cf: Hemer et al. (2011) / www.milliondollarhomepage.com
Crowd investing - a new market for entrepreneurs and investors? 3
The term "crowdsourcing" has been first used officially by Jeff Howe and Mark Robinson in
the June 2006 issue of Wired Magazine and was later used as an generic term for "crowd
funding" and to be more specific as well for "crowd investing": Instead of approaching
banks, business angels or venture capital funds, some first entrepreneurs started to rely on
the "crowd" to directly seek financial help from the public.
The UK-based software company Trampoline Systems raised 1 million GBP through crowd
funding in 2009, which is the largest amount ever raised by a single venture through
crowdfunding.5 In 2010, six crowd funding & investing platforms where founded.6
2.2 Definition, Types and tools
"Remember outsourcing? Sending jobs to India and China is so 2003. The new pool of cheap
labor: everyday people using their spare cycles to create content, solve problems, even do
corporate R&D."7, Jeff Howe said when describing how to use or to source the power of the
crowd of volunteers, predominantly in the internet. Crowd sourcing "takes place when a
profit oriented firm outsources specific tasks essential for the making or sale of its product
to the general public (the crowd) in the form of an open call over the internet"8, Kleemann
tries to set another definition
As mentioned, the term "crowd sourcing" can
be seen as a broader concept, which refers to
using the "crowd" to obtain ideas, feedback,
solutions or even financial help and equity
shareholder. It is divided into four subtypes,
of which is one of them crowd funding.9 Crowd funding itself, "the collective cooperation,
attention and trust by people who network and pool their money together (...) in order to
support efforts initiated by other people or organisations"10, can be divided again in
subtypes.11 One of them is crowd investing, which can be described as equity based
5 Cf: Schwienbacher et al.: "Crowdfunding of small .." (2010), p. 3 6 Cf: Eisfeld-Reschke et al. "Crowdfunding Studie 2011" (2011), online abstract 7 Howe, J.: WIRED Magazine, Issue 16/2006, online 8 Cf: Kleemann et al. (2008), p. 6 9 Cf: Howe: “Crowdsourcing ..” (2008), p. 280-282 & Hammon et al.: “Crowdsourcing ..” (2010), p. 698-704 10 Cf: sprowd.com: „What is Crowdfunding“ 11 Ibid: Howe (2008), Hammon (2010)
Crowd investing - a new market for entrepreneurs and investors? 4
crowdfunding with a potential financial return and ownership, mainly used in start-up-
phases.
A key role for the development of crowd funding & investing is the interactive web 2.0 and
the usage of the so called social media. User share topics and content and use the power of
the crowd ("collective intelligence") to spread these.
As the topic is young and terms are difficult to define, "crowd funding" and "crowd
investing" is often mixed in literature. Crowd funding has less returns and often deals with
art or social projects, whereas crowd investing deals with the crowd as an optional
financing form which can be seen as an alternative to the bank. Both deal with start-ups or
young companies or projects looking for capital and a crowd willing to invest or spend
money.
Main actors at the crowd investing process are:
1. Entrepreneurs or projects who are looking for capital, mostly start-ups
2. Investors, provider of capital, often fans or people who now the company/the project
3. Intermediates/platforms who act as service provider and receiver & administrator of
capital, often act as well as payment provider
4. Other actors, e.g. stakeholder, who have their own interest on the development of
financed projects (NGOs, industrial relations, subsidy agencies, politics, etc.)
2.3 Similar forms of financing
Beside crowd investing, there are of course other possibilities for start-ups to finance as
well; these shall be condensed in this chapter without going into details:
The simpliest possibility for a start-up is to take a loan at a bank: Capital is borrowed at
interest which has to be paid back without getting shares at the company or project.
Venture capital firms provide adherent equity capital (risk capital) for a temporally limited
duration (usually 3-10 years) and will consult and attent their customer. This form offers
high potentials and chances, but as well high risks.12 In this context, private equity capital
shall not be left unmentioned: It deals with a financing form related to venture capital, but
usually with a shorter duration, more shares and less risks for the investor.13 14
12 Cf: Foerderland.de: „Venture Capital“ 13 Cf: bundesfinanzministerium.de: „Private Equity“ 14 Cf: Wikipedia: „Private Equity“
Crowd investing - a new market for entrepreneurs and investors? 5
Worthwhile for start-ups are as well business angels15: wealthy private persons or networks
with founding & management experience provide capital and know-how.
2.4 Seedmatch - a short example16
Exemplarily for a typical plattform to put crowd investing into practice is Seedmatch(.de).
Founded in September 2010 by Jens-Uwe Sauer, this young German company is specialized
in connecting young start-ups and private persons who are willing to invest.
Any company can apply which can exhibit a business plan and which can convince the
expert team of seedmatch of the novelty value and the sustainability of their idea.
The minimum investment amount for investors is 250 Euro, which is unlimited upwards
respectively limited individually by the project. The investor acquires a percentage
proportion of the firm or project in form of silent partner’s interest and he participates on
firm’s profit percentaged.
After the minimum contract duration of 5-7 years the share can be cancelled and the
dividend will be paid to the investor. In case of insolvency of the project, the investor is only
liable until the amount of his capital contribution – there is no additional payment liability.
Currently only private persons can invest, but in the medium term, this will be implemented
for companies as well. Further charges on part of the investor do not incur. According to
Seedmatch17, 149 investors participate on one project – every one of them invests 608 Euro,
on average.
If project is launched, potential investors can submit within 60 days. The project is
‘successful’, when the minimum amount of money for the project is collected: The
investment threshold. In the same way, a maximum amount is defined by the project’s
initiator: The investment limit. Seedmatch’s current investing limit is 100,000 Euro. A
successful fund project pays a commission fee of 5 to 10 per cent of mediated amount of
money. Collected money will be hold in trust by Secupay AG and will be paid of stepwise. In
case of threshold is not reached within 60 days, an additional deadline of 30 days can be
agreed. If the project was still not successful at this end, invested money will be paid back to
the investors.
15 Cf: Foerderland.de: „Business Angels“ 16 Figures & facts in this chapter taken from: Seedmatch.de: FAQ 17 Cf: Seedmatch in Zahlen: Q1 / 2012
Crowd investing - a new market for entrepreneurs and investors? 6
Seedmatch offers the possibility of diversification of risk via portfolio strategy: Once logged
in, the investor can combine different investments in his profile to balance any losses with
other investments. This follows the idea of reducing unsystematic risk of shares.18 It offers
as well vivid involvement: Investors get recent updates of the company, they can
communicate via CRM and receive quarterly reports. According to Seedmatch, 271 investors
invest in more than one project.19
3 Critical analysis from entrepreneur's & investor's perspective
3.1 Entrepreneur's perspective
3.1.1 Advantages
Entrepreneurs who can't attract other investors or didn't get bank facilities often see crowd
investing as their new chance and advantage to finance monetary gaps of their start-ups.
As mentioned, crowd investing uses the advantages of web 2.0 resp. social media to reach
huge amount of people. If the entrepreneur's company is already connected with their fans
(e.g. using facebook or similar) it can activate them easily and quickly to invest and using
mouth-to-mouth marketing spread their investment plans, if the project is interesting and it
is appealing them. By using these new media methods, campaigns can often be finished fast
and gets boosted the easier the crowd is addressable: Excited users become multiplicators,
act as an advertisers and establish positive signals and credibility to the project and other
potential investors or even banks.
Furthermore, the crowd owns - which is a common thesis - "collective intelligence" or
"whisdom of crowds"20,21: If the initiator of the project taps these activily, include the crowd
on processes like decision-making, design, market research or et least product tests, he can
achieve a higher surplus than when using limited number of consultants or external experts.
This assumes the existence of CMS (Crowd Management System, Fan Management System
or Community Management System) to manage the crowd/community/fans, which is
expensive but helpful, especially for start-ups.
18 Cf: Wirtschaftslexikon24.de: "Unsystematisches Risiko" 19 Ibid 20 cf: Surowiecki: "The Wisdom of the Crowd" (2004), p. 14 21 cf: Garbe: "Crowd Wisdom - Die Weisheit der Vielen" (2010), 3Sat Reportage
Crowd investing - a new market for entrepreneurs and investors? 7
In general, the linked crowd has to be seen as the basis of the prospective market: Investing
people will always stand behind the project or the company and can be convinced easily to
buy their products or services.
3.1.2 Disadvantages
When trying to attract investors for their business idea, entrepreneurs have to make
confidential information accessable to an unclear and unknown public. This has to be seen
as the threat of flowing know-how and spy of ideas and business secrets. Thats why
business ideas that are innovative but easy to copy are not made for using crowd investing.
The development of a web community is cost- and labor-intensive, often time-consuming as
well. An active and working community connected with CRM is the prerequisite for crowd
investing. Otherwise, propestive revenues possibly won't cover required effort and
expenses.
Once developed and established, the crowd needs to be maintenanced regularly and
interacted with, which is extensive and expensive and assumes a well-regulated CRM.
Otherwise the crowd might turn away from this project as they are used to high
interexchange with initiators or at least to each other, which could show bad signals to
other potential crowd investors.
The active and well-informed people of a crowd can also disturb management decisions
made by initiator or founder with publicity effect if they don't agree to essential changes of
project aims or newly established strategies or if they feel treated unjustly. This can take
place for example as a viral protest in the web.
Crowd investing, as a very young process, still has to fight for a positive image. Many actors
could be scared when the power of the crowd is used as this has ambiguous and uncertain
touch. Some conservative financiers from the formal segment, like banks, venture capital
companies, public equity bonds or other corporations, could be deterred and might refuse
further investments in the project or the start-up if it was financed by the crowd in former
times (see initial negative attitude when the concept of business angels appeared in 1998-
200122).
22 cf: Hemer, J. et al.: "Crowdfunding und andere Formen ..." (2011), p. 78
Crowd investing - a new market for entrepreneurs and investors? 8
3.2 Investor's perspective
3.2.1 Advantages
Crowd investing brings a certain amount of advantages for private investors. Even persons
with small wallet's wish to invest can be made possible as shares starting from 250 Euro
(Example Seedmatch). Investors get profit-sharings proportional to their shares bought
from the corporation. The system is simple using the platform's CRM. Registration and
utilization of the platform is free of cost for investors (Example Seedmatch)23, neither
percantaged nor fixed costs - the entrepreneurs is charged with a success fee by the
platform which is between five to ten per cent.
Sleeping partner's holdings are the most common form of shares sold via crowd investing
platforms, profits are taxed with a straight flat percentage of 25 per cent. This kind of
shareholding is the easiest and most competative version for all persons involved.
As the share is limited to the invested amount at sleeping partner's holdings, there is no
additional payment liability in case of loss or insolvency of the project or business. So the
only risk for investors is not the get back the invested money.
Crowd investing is often used in early investment stages, especially at start-ups. This means
attractive return opportunities for investors, connected with shareholding of businesses
which might grow to financial valuable companies in the future.
Fans of a business or project is given the possibility to invest and support, to be important
and beeing a part of the business.
Investors get periodical (usually quarterly) financial reports about the business and the
value of their share. After the minimum contract period of five to seven years, the investor is
the given the possibility sell his shares every year.
3.2.2 Disadvantages
Needless to say that crowd investing also holds disadvantes for the investors, which shall be
examined now. First of all a sleeping partner's holding brings the impossibility of having a
say in the corporation. Due to the high amount of investors, this could be very difficult to
handle if the possibility would be enabled.
23 cf: Seedmatch FAQ
Crowd investing - a new market for entrepreneurs and investors? 9
The minimum contract duration of usually five years24 brings the disadvantage of being
impossible to sell shares if the company is going insolvent.
When it comes to insolvency, micro credits like sleeping partner's holdings will be handled
subordinately in all likelihood.25 This means to the crowd investors that they might never
see again any of their money due to the prior-ranking liability compared to banks or major
investors.
In addition, investors are often not qualified sufficiently to judge validity and chances of
success of a project in financial ways. Furthermore, not all entrepreneurs provide all
information required to evaluate this. It can happen that entrepreneurs provide erroneos
data which lead investors to misinterpretations. If a project fails, some investors might be
disappointed and could avoid in case of recurrence specific platforms or crowd investing as
a whole in the future. Parts of that could be seen as a disadvantage for entrepreneurs as
well.
3.3 Problems & Questions
Some side aspects and problems still seem not to be regulated as crowd investing is a very
young topic. Micro equity contracts must have been able to stand up in court and comply
formal demands, for example certified by a anotary. Sometimes it is not clear wether
specific contracts satisfy in the digital way they are and might be obligatory only in a
physical way.26
Some crowd investors run the risk of being seen as commercial investors when their action
has mainly profit character27; private lender could be seen as quasi banks.
It is to verify if a asset has the character of a value paper (Cf. Brunner, 1882). This results in
the question whether the Securities Prospectus Act (Prospektgesetz, WpHG) is in charge
and if a sales brochure has to be created, which would be expensive and must be approved
by BaFin28,29.
24 cf: Seedmatch FAQ 25 cf: Hemer, J. et al.: "Crowdfunding und andere Formen ...", (2011) p. 79 26 KWG: Gesetz über das Kreditwesen, 1998 27 Cf: KWG, §1 Abs 1.2 28 BaFin: Bundesanstalt für Finanzdienstleistungaufsicht, www.bafin.de 29 Cf WpPG: Wertpapierprospektgesetz, version of 2005-06-22
Crowd investing - a new market for entrepreneurs and investors? 10
4 A typical project for crowd investing: Trampoline systems30
Trampoline systems is an award-winning31 enterprise software vendor based in London,
founded in 2003. The company's SONAR CRM product helps customers increase the win
rate in B2B sales. It automatically maps the flow of communications between sales
executives and a customer and presents an overview of the relationship. In 2009
Trampoline became the world’s first technology business to raise finance through crowd
investing. While the global venture capital industry was in the "most severe crisis of its
history", they instead decided to pull lots of 10,000 GBP or more from the crowd, aiming for
one million GBP.
The company announced a program to raise a total of one million GBP spread over four
rounds. The first round of 260,000 GBP was completed in October 2009 and a second round
of 350,000 GBP opened in August 2010.
30 Figures in this chapter are take from crowdfunding.trampolinesystems.com (assessed 2012-05-15) 31 Cf trampolinesystems.com (assessed 2012-05-15)
Crowd investing - a new market for entrepreneurs and investors? 11
5 Conclusion
In this paper, I have presented the ways in which modern strategies are crucial for a
corporation’s economic success. I have first worked out a short definition of the term
strategy in its general sense. ny Europe.
Crowd investing turned out as a giant marketing tool to attract other investors as this
pioneer demonstrates.
Seiten 95-99: "Eignung von VF als Lückenbüßer" ...
BLA BLA
und Seiten 111-115
BLO BLO
Crowd investing - a new market for entrepreneurs and investors? 12
6 Bibliography
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- (2011) SSRN eLibrary
bundesfinanzministerium.de:
http://www.bundesfinanzministerium.de/nn_39842/DE/BMF__Startseite/Service/Glossar
/P/001__Private__Equity.html (2012-05-08)
Cosh A., Cumming D. and Hughes A.: "Outside Entrepreneurical Capital",
(2009) Economic Journal 119, 1494-1533
crowdfunding.trampolinesystems.com (assessed 2012-05-15), see screenshot
Eisfeld-Reschke J. and Wenzlaff K.: “Crowdfunding Handbuch”,
(2011) Institut für Kommunikation in sozialen Netzwerken
Eisfeld-Reschke J. and Wenzlaff K.: “Crowdfunding Studie 2011”,
http://www.ikosom.de/2011/06/13/crowdfunding-studie-2011, (2012-04-10)
Foerderland.de: "Venture Capital", "Business Angels"
http://www.foerderland.de/1373.0.html (2012-05-08)
http://www.foerderland.de/1358.0.html (2012-05-08)
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neuartige Finanzierungsformen für Kreativprojekte”,
(2010) Landeshauptstadt Stuttgart, Wirtschaftsförderung
Garbe, A.: "Die Weisheit der Vielen / 3Sat",
(18.06.2010), 3Sat Reportage - Sendung 10.04.2011, Topic: "Online Crowd"
Hammon, L.; Hampel, S.; Hippner, H.: “Crowdsourcing” in: WISU, Nr. 5, 2010, S. 698-704
Hemer J., Schneider U., Dornbusch F. and Frey S.: “Crowdfunding und andere Formen
informeller Mikrofinanzierung in der Projekt- und Innovationsfinanzierung”, (2011)
Fraunhofer Verlag
Crowd investing - a new market for entrepreneurs and investors? 13
Howe, J.: "The Rise of Crowdsourcing" (June 2006) - see screenshot,
WIRED Magazine: http://www.wired.com/wired/archive/14.06/crowds.html
Howe, J.: "Crowdsourcing. Why the Power of the Crowd is Driving Future of Business",
(2008) New York, Crown Business/Three Rivers Press
http://www.hyperion-records.co.uk/al.asp?al=CDH55333&f=Mozart:%20Piano%25,
(2012-05-09)
Klein, R.: "Crowd funding-Monitor"
http://www.fuer-gruender.de/kapital/eigenkapital/crowd-funding/monitor,
(2012-04-11)
Kleemann, F., Voss, G. and Rieder, K. (2008) “Un(der)paid Innovators: The Commercial
Utilization of Consumer Work through Crowdsourcing.” Science, Technology & Innovation
Studies 4:1, 5-26.
Schwienbacher, A. and B. Larralde: "Crowdfunding of Small Entrepreneurial Ventures." -
(2010) SSRN eLibrary
Seedmatch.de: "FAQ", "Über Seedmatch - Visionen",
http://www.seedmatch.de, (2012-04-15)
Seedmatch.de "Blog / Seedmatch in Zahlen Q1/2012",
http://blog.seedmatch.de/2012/04/04/seedmatch-in-zahlen-crowdfunding-fur-startups-
q12012 (2012-04-04)
Sprowd.com: „What is Crowdfunding“, see screenshot (Assessed: 2012-05-13)
Surowiecki, J.: "The Wisdom of the Crowd",
(2004) New York, Anchor Books
Trampolinesystems: "Trampoline wins CRM "Rising Star" award", see screenshot, (2008)
http://www.trampolinesystems.com/trampoline-wins-crm-rising-star-award/awards
Crowd investing - a new market for entrepreneurs and investors? 14
Warner A.: "Krautfunding: Deutschland entdeckt die Dankeschön-Ökonomie",
(2011) KindleEdition/e-book-news.de, C.C. license
Wikipedia: "Statue of Liberty", "Private Equity"
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http://de.wikipedia.org/wiki/Private_Equity (2012-05-08)
Wirtschaftslexikon24.de: "Unsystematisches Risiko",
http://www.wirtschaftslexikon24.net/d/unsystematisches-risiko/unsystematisches-
risiko.htm (2012-05-15)
n/a: "Eigenkapital über Crowd funding und Crowd investing"
http://www.fuer-gruender.de/kapital/eigenkapital/crowd-funding,
(2012-04-11)
n/a: "Gesetz über das Kreditwesen"
http://www.bundesbank.de/download/bankenaufsicht/pdf/kwg.pdf, (1998)