Crowdfunding Financing Analysis and Its Effects on Start-up Businesses - Literature review Example

Crowdfunding Financing Analysis & Its Effects on Start-up Businesses Prepared by (Student’s Name) Course Name Date Introduction New businesses ventures would always be in the need for resources in order to succeed and one of the most important ways through which they can accomplish is through financing. In today’s world, crowdfunding for businesses has come out as a favourable way for which numerous entrepreneurs can fund their new ideas and thus, ventures without having to look for venture capitalists of even other form of conventional sources of venture investments. Crowdfunding is the use of the internet to raise capital for start-ups regardless of the borders. It is deemed to be indeed an attractive approach since it does not only results to rise of capital but also allow testing of marketability for the business operations before opening for business. Most of the governments across the globe promote crowdfunding by start-ups since it creates employment; promote economic recovery and aspects related to innovations. The focus of this paper is to examine crowdfunding as process of raising capital for start-ups, its effects; benefits and challenges associated with its adoption. Body Research indicates that 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 (Crowd Funding Alternative: Why Small Businesses Owners & Entrepreneurs Prefer Funding Through Business Angel Investors, 2014). 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. Markedly, it is ascertained 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 determine future profitability potential as noted below. '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). Gaynor, Morse and Pevzner (2015) notes of the Jumpstart Our Business Start-ups (JOBS) Act, which 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. Consequently, it is argued 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. It is further 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. On the Contrary, it possesses 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. Korporaal (2014) notes that potential investors should always take precautions whenever engaging in crowdfunding finance option. In contrast to this, 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 (Korporaal, 2014). 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 (Korporaal, 2014). Mollick (2014) suggests that such aspects as 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 (Mollick, 2014). 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 (Belleflamme, Lambert and Schwienbacher, 2014). 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. It is established that while crowdfunding permits an opportunity to test the marketability aspect, easier access to capital it fails to result to investor protection from fraud and might limit them from accessing pertinent advice. Recommendations To begin with, entrepreneurs that are in the course of looking up for crowdfunding for their start-ups should analyse and thus, deem it important to ascertain the administrative and accounting-related issues that might be faced in the process. Start-up entrepreneurs should note that while crowdfunding is basically related to donors receiving rewards the process of recording this level of contributions is indeed time-consuming and demanding for that matter. In essence, should a significant number of investors translate to being shareholders; it is expected that businesses will face intensive administrative and accounting issues hence a requirement for top notch bookkeeping and investment skills and models (Sullivan & Ma, 2012). Notably, in the event that a significant section of these stakeholders are made up of unsophisticated investors; then it is expected that it will pose a challenge that not only relates to administration but also communication models. Subsequently, Sullivan and Ma (2012) notes of the possibility of start-up entrepreneurs facing the risk associated with their idea being stolen by fairly-funded investors or even large entities. To protect them from this, it is recommended that these entrepreneurs engage in intensive securing process that might include; patent rights for their ideas. Consequently, it is ascertained that there is a high possibility for fraud in crowdfunding process. Such regulations as the JOBS Act does not restrict start-ups for in numerous numbers of ways thus, exposing the entire process to activities related to fraud (Wheat, Wang, Byrnes, & Ranganathan, 2012). In fact, there are numerous cases of start-ups initiating as clear and genuine ventures but later results to being fraud. In such events, it is recommended that the numerous regulatory formulate special provisions aimed at protecting unsophisticated investors from potential malice (Wheat et al, 2012). This is especially true when since the underlying objectives and goals of legislative changes are merely focused on crowdfunding; and fail to be applicable in such important cases as other ways of raising capital for start-up businesses. Of particular interest to note, considering that most of the crowdfunding activities are conducted over the internet; it is extremely challenging to ascertain whether or not certain ventures are legitimate. The fact that it is conducted over the internet and not through virtual meetings; investors cannot be sure of what they are engaged in directly. Conclusion To sum up the discussion, it can be noted that crowdfunding is indeed one of the easiest ways for which start-up businesses can access and raise capital without having to rely on stringent regulatory measures. The paper defines crowdfunding is the use of the internet to raise capital for start-ups regardless of the borders. It is deemed to be indeed an attractive approach since it does not only results to rise of capital but also allow testing of marketability for the business operations before opening for business. This process results to huge economic benefits to a given country like creation of jobs as well as results to intensive exploitation of innovative technologies. On the contrary however, the process can be marred with fraudulent such that unsophisticated investors might lose their money resources to illegitimate ventures. it is thus recommended that stringent measures be put in place to protect unsophisticated investors; entrepreneurs should focus on expanding their administrative and accounting skills in order to conduct successful start-ups as well as ensure to protect their ideas from stolen through patent rights. References Belleflamme, P., Lambert, T., & Schwienbacher, A. (2014). Crowdfunding: Tapping the right crowd. Journal of Business Venturing, 29(5), 585-609. Crowd funding alternative: Why small businesses owners & entrepreneurs prefer funding through business angel investors. (2014, Oct 22). PR Newswire Gaynor, G., C.P.A., Morse, J., &Pevzner, M., C.P.A. (2015). The CROWD-FUNDING EFFECT. Strategic Finance, 97(4), 35-39. Korporaal, G. (2014, Sep 03). CROWD FUNDING A NEW FRONTIER, Australian edition]. The Australian Mollick, E. (2014). The dynamics of crowdfunding: An exploratory study. Journal of business venturing, 29(1), 1-16. Sullivan, B., Ma, S. (2012). Crowdfunding: potential legal disaster waiting to happen. Retrieved from Forbes.com Valanciene, L., & Jegeleviciute, S. (2013). Valuation of crowdfunding: benefits and drawbacks. Economics and Management, 18(1), 39-48. Wheat, R. E., Wang, Y., Byrnes, J. E., & Ranganathan, J. (2012). Raising money for scientific research through crowdfunding. Trends in Ecology and Evolution, 2 (28), 71-72. Read More