Can crowdfunding solve market failures?

Entrepreneurship is essential for economic growth and employment creation. Yet despite its key role in the economy, entrepreneurs find it hard to access the financing they need to start and expand their businesses. Lack of funding is perennially identified as a major constraint on new venture growth. Moreover, traditional venture capital markets have been criticised for not being inclusive in terms of geographic reach, gender, or race

Crowdfunding solves market failures in new venture financing

It engages a wider pool of entrepreneurs and investors, argue Saul Estrin and Susanna Khavu

Innovations in emerging markets: The case of mobile money

Mobile money is a financial innovation that provides transfers, payments, and other financial services at a low or zero cost to individuals in developing countries where banking and capital markets are deficient and financial inclusion is low. We use transaction costs and institutional theories to explain the growth and impact of mobile money. Having developed a new archival dataset that tracks mobile money deployment across 90 emerging economies during 16 years between 2000 and 2015, we address the question of relative economic impact of the banking and telecoms sectors in the provision of mobile money. We show that telecom groups and not banks are more likely to launch mobile money in countries where legal rights are weaker and credit information less prevalent. However, it is when mobile money is offered via a banking channel that the spillover effects on the economy are greater. Findings have significant implications for policy and strategy

Equity crowdfunding and early stage entrepreneurial finance: damaging or disruptive?

Equity crowdfunding (ECF) offers founders of new ventures an online social media marketplace where they can access a large number of investors who, in exchange for an ownership stake, provide finance for business opportunities that they find attractive. In this paper, we first quantify the evolution of the ECF market in the UK, the world leader, as well as the benign regulatory environment. ECF already represents more than 15% of British early stage entrepreneurial finance. We then use qualitative methods to explore three research questions. First, do these large financial flows via ECF platforms supplement or merely divert more traditional forms of funding for entrepreneurs? Second, do investors understand and appropriately evaluate the risks that they are bearing by investing in this new asset class? Finally, does ECF finance bring with it the spillovers, e.g. advice and guidance critical to entrepreneurial success, associated with other sources of funding such as Venture Capital? Our study is based on extensive interviews with investors, entrepreneurs (including some who chose not to use ECF in favour of traditional funding sources) and regulators. We conclude that ECF provides real additionality to the sources of entrepreneurial finance while not bringing major new risks for investors. This suggests other jurisdictions might consider implementing the British “principles based” regulatory framewor

Access to digital finance: equity crowdfunding across countries and platforms

Financing entrepreneurship spurs innovation and economic growth. Digital financial platforms that crowdfund equity for entrepreneurs have emerged globally, yet they remain poorly understood. We model equity crowdfunding in terms of the relationship between the number of investors and the amount of money raised per pitch. We examine heterogeneity in the average amount raised per pitch that is associated with differences across three countries and seven platforms. Using a novel dataset of successful fundraising on the most prominent platforms in the UK, Germany, and the USA, we find the underlying relationship between the number of investors and the amount of money raised for entrepreneurs is loglinear, with a coefficient less than one and concave to the origin. We identify significant variation in the average amount invested in each pitch across countries and platforms. Our findings have implications for market actors as well as regulators who set competitive frameworks

Innovations in emerging markets: the case of mobile money

Mobile money is a financial innovation that provides transfers, payments, and other financial services at a low or zero cost to individuals in developing countries where banking and capital markets are deficient and financial inclusion is low. We use transaction costs and institutional theories to explain the growth and impact of mobile money. Having developed a new archival dataset that tracks mobile money deployment across 90 emerging economies during 16 years between 2000 and 2015, we address the question of relative economic impact of the banking and telecoms sectors in the provision of mobile money. We show that telecom groups and not banks are more likely to launch mobile money in countries where legal rights are weaker and credit information less prevalent. However, it is when mobile money is offered via a banking channel that the spillover effects on the economy are greater. Findings have significant implications for policy and strategy

Mobile payment services in developing countries. Information, trust, and training: The ingredients for retail agents’ success

Financial services in developing countries are often expensive, leaving many of the poorest citizens without access to bank accounts. However, the growth of mobile payment services have been seen as a way to increase access by allowing individuals to send and receive payments through their phones. Although there has been much research on the benefits of ‘mobile money’, there has been relatively little academic inquiry into the firms who provide such services and their effectiveness. This research comprised of two country level surveys of the retail agents involved in selling mobile payment systems in Bangladesh and Tanzania. Its aim was to understand their relationship with the distributors or master agents for whom they sell the service for. The findings of the research suggest that the performance of retail agents in Bangladesh and Tanzania are strongly affected by the relationship they form with their distributors or master agents, particularly in terms of communication, training, and goals. The researchers conclude that in order to improve the performance of retail payment agents, it is important to select agents carefully and train them well

The evolution and adoption of equity crowdfunding: entrepreneur and investor entry into a new market

Equity crowdfunding (ECF) offers entrepreneurs an online social media marketplace where they can access numerous potential investors who, in exchange for an ownership stake, may supply them with finance. In this paper, we describe the evolution of this market in the UK. Using an inductive qualitative longitudinal research design, we analyse the emerging views of entrepreneurs and investors towards ECF. Our interviewees include large and small-scale investors, as well as market participants who have chosen not to invest or raise funds via ECF. We find that the large financial flows to entrepreneurs in the UK via the ECF platforms, nearly half a billion GBP since 2011, have probably been largely incremental to traditional sources of early stage entrepreneurial finance. Moreover, our research indicates that for the most part, investors appear to understand and appropriately evaluate the risks that they are bearing; ECF investments are perceived as a high risk, high return component within individuals’ portfolios. Investors also use their communication with peers and entrepreneurs via the ECF platform as a learning tool. On the entrepreneurs’ side, ECF allows them to test their products, to develop their brand, to build a loyal customer base and to turn customers into investors. We conclude that policymakers, with the support of a locally appropriate regulatory framework, could support equity crowdfunding as one of the market choices available for entrepreneurs looking to start or grow their ventures