New Arena : Social Media and Corporate Finance

Funding a business or innovation is always a challenge for an entrepreneur. Traditionally, many start-up businesses approach bank or financial institution for funding. Some are successful but most are not partly due to little trading history. Thus makes a priority for an entrepreneur to find an alternative way to fund the business.

Recently a new arena of funding source has opened up.  “Crowdfunding” becomes a popular subject in today corporate world. Though it claims as new frontier, it is primitive and original in my opinion. History of “Crowdfunding” is originated in 1700 but it could even be earlier than that period. It has evaluated in different forms but the principle is a pool of funds from various investors for the same business purpose. Traditionally it would be from the family members and friends, however, in today terms, this could be from any investor who has interest in the project. The communication is through online platform, a social media.

Today’s “Crowdfunding” has three features; donation, equity and debt. Depending on the investor’s desire and interest, there are various website serving crowd funding facilities. The rewards are different based on their choice of investment. People invest because simply they believe in the aim of the project. Therefore, it could be in the form of social status or acknowledgement in “Donation Crowdfunding” and those who invest for equity and debt may have financial return in the form of interest or share of a start-up company. The value of the share in the start-up period may be different in future depending on the success of the business.   

Lack of regulatory authority means there is fraud risk. The investor has to carefully observe what they have chosen. However, the trend appears to be improving. In 2012, the US Congress passed JOBS Act (Jumpstart our Business Start-ups) to help the entrepreneurship and small businesses. Together with this, “Crowdfunding” becomes more popular and SEC US Security and Exchange Commission is now working on the law that a company can only sell to an investor through a middle man; a broker or a website that is registered with SEC.

For those businesses who are struggling to obtain credit from the bank, “Crowd funding” is a good opportunity. However, it is different for the investors. Unless they are willing to take a risk to lose the investment they have made, it appears they are not ready for “Crowdfunding” yet.

However, it does not mean it is totally unsafe due to lack of regulatory status. UK has its own code of conducts through UK Crowdfunding Association FCA. Through this FCA, there are many UK websites are participating in UK Crownfunding activities. Croudcube is one of platform offering “Crowdfunding” activities. UK TV presenter from Channel 4, Kevin McCloud has used this “Croudcube” to raise funds for his program “Grand Design”(E Moore, FT article, Jan 31, 2014). In UK alone, over £10m was invested for small business through  crowd funding during 2012 and 2013.

In summary, this acknowledges that there are investors who wish to invest through “Crowdfunding” regardless of the regulatory rules. But it is fair to comment that it will be more beneficial if there is a proper regulation and protection for the investors too.

Reference:

 http://www.ft.com/cms/s/0/1584f99c-8902-11e3-bb5f-00144feab7de.html?siteedition=uk#axzz2s9Mg2OI3

https://www.abundancegeneration.com/
https://www.kickstarter.com/blog/five-million-backers
http://www.nesta.org.uk/project/crowdfunding

Image Source: http://www.forbes.com/sites/work-in-progress/2012/09/21/the-jobs-act-what-startups-and-small-businesses-need-to-know-infographic/