Provide funding to small, early-stage, emerging firms that are deemed to have high growth potential have been around since societies started trading of goods and services among themselves.
These new companies, with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a “bank” loan or complete a “debt” offering.
Today, Venture capital (VC), Crowdfunding and Initial Coin Offering (ICO) are some of the more common funding methods. Though they all look similar in nature, their form of financing are very different. Each has its own benefits, challenges and risks.
Venture capital (VC) is a type of private equity form of financing. Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake, in the companies they invest in. Venture capitalists take on the risk of financing risky start-ups in the hopes that some of the firms they support will become successful. The start-ups are usually based on an innovative technology or business model and they are usually from the high technology industries, such as information technology (IT), clean technology or biotechnology.
The typical venture capital investment occurs after an initial “seed funding” round. The first round of institutional venture capital to fund growth is called the Series A round. Venture capitalists provide this financing in the interest of generating a return through an eventual “exit” event, such as the company selling shares to the public for the first time in an initial public offering (IPO) or doing a merger and acquisition (also known as a “trade sale”) of the company.
The financial benefit of investing under the VC Fund umbrella is not so promising for most people. According to Founder Equity LLC (US) report, ten year returns for early stage venture were 3.9% as of 2013, while returns for the S&P 500 for the same period were 8%. And that’s before adjusting for risk, which makes venture returns appear even more lackluster. http://founderequity.com/the-new-reality-of-venture-capital/
Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it is often subject to securities and financial regulation. Equity crowdfunding is also referred to as crowd-investing, investment crowdfunding, or crowd equity.
Investment crowdfunding can be debt-based or equity-based, or can follow other models, including profit-sharing and hybrid models. The term equity crowdfunding is often used to describe crowd investing into both debt and equity based instruments when they are offered on an equity crowdfunding platform. Investors give money to a business and receive ownership of a small piece of that business. If the business succeeds, then its value goes up, as well as the value of a share in that business—the converse is also true. Coverage of equity crowdfunding indicates that its potential is greatest with startup businesses that are seeking smaller investments to achieve establishment, while follow-on funding (required for subsequent growth) may come from other sources.
A report published on September 2016 by Seedrs, one of the UK’s big three equity crowdfunding platforms, throw some light into the performance of companies that have raised money with it. Investors who put money into all of the companies raising cash on Seedrs during 2012 and 2013 would have lost money on four out of 10 of them – including, presumably, some that went bust altogether. They would, however, still have been ahead, courtesy of the 48.7 per cent of those businesses that have risen in value. https://www.forbes.com/sites/davidprosser/2016/09/13/crowdfunding-delivers-a-40-return-and-a-40-failure-rate/#2da279b33473
Initial Coin Offering is the new kid on the block financing. Startups built on blockchain technology—distributed ledgers that power cryptocurrencies like Bitcoin—are increasingly enticed by the option of hosting an “initial coin offering,” or an ICO, as insiders call it. Instead of accepting some fund’s money in exchange for equity stakes, these firms decide to issue their own digital currencies, or tokens, that anyone can buy in a crowdsale. Proceeds from the auction of these virtual shares help fund the businesses.
The difference is that whereas Initial Public Offering (IPO) [when a company traditionally lists on a stock exchange are well-defined and understood by governments], ICO is murkier. The U.S. Securities and Exchange Commission and other regulatory agencies are currently investigating the practice. The tokens, proponents say, are not quite like a security, yet not quite like a currency either. They’re something in between.
The fundraising tactic, which is sort of like a crypto-financial twist on a Kickstarter campaign, has several advantages over alternatives. First and foremost, it’s eminently liquid. Backers’ funds are traditionally tied up in their bets until the companies “exit,” going public or selling out. In this case, investors can cash in and out whenever they like, converting tokens into Bitcoin, Ether, and fiat currency at their leisure.
In the absence of due diligence requirements, pump and dumps, Ponzi schemes, and buggy foundational software can run rampant. Even Ether’s debut was marred by the spectacular bust of a much-hyped project, a decentralized venture capital firm called The DAO, built atop its network. (This was due to a hack, rather than malicious intent of the founders.) One must weigh the promise against the peril.
http://fortune.com/2017/03/31/initial-coin-offering/
Just for the months of June and July 2017 alone, the amount of money raised by cryptocurrency and blockchain start-ups via so-called initial coin offerings (ICOs) has surpassed early stage venture capital (VC) funding for internet companies. https://www.cnbc.com/2017/08/09/initial-coin-offerings-surpass-early-stage-venture-capital-funding.html
But ICOs have received a lot of criticism and are under scrutiny from regulators. The Monetary Authority of Singapore (MAS), said in a recent statement that ICOs are “vulnerable to money laundering and terrorist financing risks due to the anonymous nature of the transactions, and the ease with which large sums of monies may be raised in a short period of time.”
Please do your own due diligence if you want to invest in either one or more of them. Also, if you do, please be prepared to lose it all. The safest bet is, not to invest more than 5% of your net investable assets.
You’re welcomed to share your experiences on the above.
Thank you for dropping by.
Reuben Ong
(Article Acknowledgement with Thanks: Extracts are from Wikipedia or unless otherwise stated.)
[wpforms id=”410″]