Crowd Funding: A Modern Approach to Fund Raising

This assignment discusses the traditional methods of raising funds and the modern approach of crowd funding. It highlights the advantages and disadvantages of crowd funding for both investors and businesses. The impact of crowd funding on MNEs is also discussed.

INTERNATIONAL FINANCE

EXECUTIVE SUMMARY
This assignment consists of various sources through which funds can be raised. There are certain
traditional methods to raise funds whereas there is also an alternative called the crowd funding.
This report states the advantages as well as disadvantages of raising funds through crowd
funding. It also contains the ways in which crowd funding has influenced MNE’s. The impacts
of raising funds through different alternatives are stated in this project.

INTRODUCTION
A business is a transformation of a person's idea into reality. It costs everything to start up a
business in terms of physical efforts and monetary values. This is how the concept of 'Financing'
came into existence. To be someone's reality from an idea, a person needs funds or more
precisely, capital to set up his business and execute its operations and make profits. Considering
different type of business, the different sources of fund can be raising of money from public,
investments from relatives & friends, self savings and loans from banks & financial institutions.
Our study is based on the concept of 'Crowd funding' that has come into existence and is
significantly used by a number of businesses (Fridson & Alvarez, 2012). .

Answer 1.
Let us first discuss the various types of funding that were widely used before and are considered
as traditional approaches these days.
 Own Capital: A person may have his own life time savings which he may invest to start
up his business. The main advantage of it is the capital is of self and therefore, no burden
of interest will arise. However, an opportunity cost is associated with such funds. For
example, such funds could have been invested in some profitable company or could have
been deposited as fixed deposits (Ittelson, 2009).
 Friends & Family: these are the people who are mostly approached first or rather because
of their influence and support in both monetary and emotional terms, a person sets his
mind to start up a business. It is important for a person to determine the nature of such
funds. For example, whether it has been invested as a loan or equity investment because a
loan giver would take an interest payable at regular intervals and an equity investor will
take shares of a company and will form a part of the ownership of the entity. This is
however suitable when a small amount of investment is required and also, there is a
strong network among people. Also, the risk is comparatively low (McLaney & Adril,
2016).
 Small Business Loans: Borrowing from the bank is basically in the form of overdraft
facility. It is for meeting the short term initial requirements like working capital needs,
that is, making a balance between the expenses and income or cash outflows and cash
inflows. Loans from banks carry low risk on the part of bankers because banks provide
loans after proper scrutiny and after having a security against such loans. Also, these type
of loans carry a high interest which may crate a burden in the future of the business if
adequate profits are not earned.
 Early Investors: These investors consider various business plans and invest their money
in such business plans they think are strong enough and will have future profits. These
investors are like angels to the owner of the business model as all it takes for a person to
win the confidence and trust of such investors in their plans. These investors open up the
doors for such business planners. Such investors usually invest money on an agreement

basis and may either take shares of the company, or became a partner of the business and
behaving as a nominal partner or a dormant partner.
 Equity Investment: If a company is limited by shares, it can raise funds through public
offer if securities where the funding will be done by the equity holders and they will get a
return in the form of dividend (Lerner, 2009). In such a case, while bringing an offer of
public issue, it is mandatory for the company to clearly state the purpose of such funding
and how it is proposed to be spent and such other details as required.
Such approaches are the ways opted since the revolution of business came into existence.
However, with advancement in technology and science, newer and newer ideas coming into
effect, another trendy source of fund called as 'Crowd funding'. Various platforms such as Pledge
Me enable funding through sources such as loans, equity campaigns and donations. Crowd
funding is useful for an entity if it has a strong network among people and has a strong
recognition and relations in the market. A strong social background is necessary if a person
wishes to fund his business through crowd funding. Also, the crowd funding business can come
into effect only if the purpose of it connects with the public and infect, it is mandatory to have
the public and such other persons to have a clear understanding of the business and its operations
targeted (Girard, 2014).
We cannot disagree that crowd funding is taking up the most popularity these days although the
traditional approaches are still relevant. Where crowd funding is an approach of raising money
from various individuals, fund raising is an approach of asking for a financial support. The
traditional sources are an offline approach that is, fund raising; marketing, branding, campaigns
for creating awareness, etc are all done offline. But, the crowd funding, being a modern approach
is done online using electronic platforms such as Milaap. Traditional sources comes from those
people who see a benefit in your business and are liable to receive those additional benefits they
may receive in terms of interest, dividend, profits, etc. However, crowd funders are those people
who invest because they believe in a person's idea (Piper, 2015).

Answer 2
The crowd funding, being a popular source of fund raising, also has certain advantages and
disadvantages. It may seem attractive to a majority but it can still be not a good idea for some.
The advantages of crowd funding can be in different terms to both investors and the business.
There is no clear answer to this query however, three reasons can be considered as the
advantages for investors:
 It reduces costs: Internet has now become the means of business. Because of it, buyers
and sellers have come in direct contact without many efforts. It is a matter of having
timely and adequate information on the internet through which investors can gain
efficiently. Such fundraising approach reduces the transaction costs and search costs and
encourages more and more participation in the market.
When an individual wants to make an investment in a profitable company, it has three options -
firstly, it can find a company on its own and manage the investment alone, join some angel
investors group and make investment as directed (Kuti, 2014). As a result, it is a task for a
potential investor to identify a company with good plans and also, such decisions require a good
network. Costs such as legal formalities cost, background checks cost, and equity documentation
costs, fees for finding etc are being minimized. The crowd funding website minimizes the cost
by standardizing the legal documents, background check up procedures, and other expensive
expenses, therefore, in case of other costs, the investors pays nothing.
 Higher Returns: The returns that are made on the crowd funding equity are larger than
those offered by other assets. A right investment can increase the value of the initial
investment. It is probable that all the projects may not turn out to be successful, but in a
market that is recording low interest rates, bond yields & annuity rates, the investors
these days are attracted to equity crowd funding more (Siciliano, 2015).
 Tax Advantages : Taxpaying investors can enjoy certain benefits such as claiming
exemption under Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment
Scheme (EIS), under which an exemption of 50% and 30% in the investment as a relief
subject to certain conditions. For example, holding of shares for three years.

 Other Rewards: The crowd funding scheme offers other rewards in the form of discounts,
offers, coupons, recharges, etc.
 Recognition of Small Investors: There are numerous Investors that aren't recognized
because of being able to invest a small amount and therefore, at times, don’t get an
opportunity to participate in the market. Crowd funding concept offers diversification,
helping such investors to have a value of their investment (Loughran, 2010).
The advantages of crowd funding to the business are:
 Provides Access to Capital: The crowd funding concept has made easier for the startups
to raise funds without getting into complicated procedures of business. Such investors are
more interested in the execution of the plan rather than the return they might receive on
the investments.
 Minimization of risk: Since the funds are received from a large number of investors, the
overall risk is less than receiving capital from one or two sources.
 Other benefits along with Money: The investors being interested in the execution of the
plan. They provide other benefits like providing feedbacks, comments and different ideas
that helps an entity in its early stage.
 Increases marketing and a network of investors: Such raising of fund brings an entity in
contact with numerous investors and therefore, a marketing of the business is also done.
Where there are advantages to both the investors and the business, there exists disadvantages
also of this idea. Let us enumerate the disadvantages of this modern approach (Rayman, 2009):
 It should be thoughtful and expects hard work: A lot of efforts are included like
preparation of an eye appealing profile, interesting video for convincing investors,
thoughtful marketing, execution of campaigns, etc. Such efforts may not be worth.
 No guarantee: There is no guarantee whether it will succeed in its aims or not. It is either
all or nothing. It is the trust and confidence which is the foundation of such raising of
funds which may shake in case of a downfall (Pratt, 2009).
 Fraud: Most of the crimes are happening online these days. It may happen that an
impressive business plan aims to deceive a large number of investors and thus, shaking
the trust on the concept of crowd funding (Smith, 2016)

.

Answer 3
Crowd funding, being a popular source of funding, isn't at the bottom level rather the concept of
this modern approach has spread to big companies including multinational enterprises (MNEs).
Such MNEs are in support of this approach as it uses an e-platform and gives recognition to both
small investors and business plans of small vendors (Bragg, 2016).
Such MNEs direct their departments to study the concept of crowd funding as such MNEs target
to invest in proven business plans and so as to influence one's life by bringing a life in its
business plan (Lacasse, 2016). These MNEs often make huge investments in one go and has
huge investments in return; in that case, funding small numerous business plans is no big deal for
them rather they are like angels to these startups. In such a large population, to reach all the
targeted people, Internet is the most easy source to reach to a thousand of people at one go and
similarly, investors comes to know about varieties of plans and so according they make their
decision. MNEs uses such crow funding websites to search potential plans and make investments
to have a favor in return maybe, or to let small vendors get an opportunity of bringing their
dream into reality, etc (Case, 2012).
The diagrams shows us an analysis of approx funds raised during past few years depicting the
growing popularity of the crowd funding approach. The pie chart signifies the using of such fund
raising approach over traditional approaches, that is, for example, equity funds (Mattessich,
2016).

Such an influence will have a positive impact on the lives of both business startups and MNEs.
For a business startup, it acts an an opportunity to turn into reality and for an MNE, it is more
likely of doing good for such small projects in comparison to the revenues earned by them and

developing a network for itself and generating goodwill out of it. Also, such investments will
boost the confidence of these vendors in their business plans while it will create a favorable
impact on the social and economic environment of such MNEs (Paul, 2014).

CONCLUSION
It is not that all the projects are going to succeed being funded by crowd funding, but a well
informative plan if executed well can make money and bring benefits both in terms of happiness
and money. However, we should consider the fact that crowd funding is still unknown to a huge
population inspire and therefore; inspire of increasing usage of mobile phones & internet,
therefore, awareness is to be created to make this approach more popular. It is likely to happen
by 2025 that crowd funding approach will overcome the traditional approaches and internet will
became the most useful medium for fund raising (Herciu, 2017)
.

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