Utilizing Crowd Funding Utilizing Crowd Funding for Support SMEs - - PowerPoint PPT Presentation

Utilizing Crowd Funding for Support SMEs funding Utilizing Crowd Funding for Support SMEs funding

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• 2013. 04

Young Do Kim, Research Fellow

Korea Institute of Finance

Contents

1. Introduction 2. Crowd Funding in Korea 3. Characteristics of Crowd Funding 4. Potential to Support SMEs in Korea

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1. Introduction 2. Crowd Funding in Korea 3. Characteristics of Crowd Funding 4. Potential to Support SMEs in Korea

• 1. Introduction

A funding platform that raises small sums of money from many individuals, mostly online, to fund business activities or personal projects.

<Structure>

Investor A

B C D E F Online Platform

Projects (SW development, film directing)

Funds Small investment

• 1. Introduction

A home-grown funding platform that combines P2P financing with IT elements of SNS. <Traditional Lending> <P2P Lending> <Crowd Funding>

Intermediary Fund Seeker Fund Seeker Web platform Fund Seeker

Deposit Credit making/ monitoring of information Direct lending Web info production/al gorithm lending/credit rating

Crowd funding platform

consen sus conse nsus Interactive

• 1. Introduction

There are several types of crowd funding platforms: ① Investment type ② Lending type ③ Non-monetary return type ④ Donation type

• Investment type: Fund providers acquire shares of a venture business

and receive dividend(or return) for their investment.

• Investment type: Fund providers acquire shares of a venture business

and receive dividend(or return) for their investment.

• Lending type: Fund providers receive interests or other fixed income,

before being paid for investment at a given timing.

• Non-monetary return type : Fund providers make monetary contributions

and receive non-monetary benefits.

• Donation type: Fund providers give money to projects they support

without compensation.

Contents

1. Introduction 2. Crowd Funding in Korea 3. Characteristics of Crowd Funding 4. Potential to Support SMEs in Korea

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1. Introduction 2. Crowd Funding in Korea 3. Characteristics of Crowd Funding 4. Potential to Support SMEs in Korea

• 2. Crowd Funding in Korea

For the past three years, the volume of crowd funding around the world has grown 75% each year ($1.5 billion in 2011)

<Volume of Crowd Funding in 2011>

Source: Massolution

• 2. Crowd Funding in Korea

In Korea, crowd funding companies began to emerge in 2007, and have raised KRW178.7 billion to date.

• By amount, “lending type” is most frequently used, and by the

number of project, “donation type” is most common.

• Recently, “investment” type is growing to fund startup businesses.
• By amount, “lending type” is most frequently used, and by the

number of project, “donation type” is most common.

• A regulatory framework on crowd funding is yet to be established

in Korea, so that most companies are currently classified as “online, telemarketing sales business.”

• 2. Crowd Funding in Korea

In Korea, crowd funding businesses are divided into three categories: personal lending, corporate funding, support for culture/art activities

<Crowd Funding Companies in Korea>

Type Company Note 170 complete or ongoing culture/art projects Source: Data from surveyed companies Donation Tumblbug 170 complete or ongoing culture/art projects Fundu Contents in culture, art, IT, venture businesses Good Funding Fund-raising for the film “26 Years” Upstart Small-sized creative projects Sponsor/Donation Concrete Mostly in art/welfare areas Sponsor/Share Investment/Lending Opportune Business sponsor, share investment, lending Lending Money Auction For individuals and small-sized businesses Pop Funding For individuals and small-sized businesses

• 2. Crowd Funding in Korea

Most personal loan borrowers have poor credit status, with similar profile to customers of savings banks and private lending businesses.

• Businesses of Money Auction and Pop Funding show that many use

crowd funding to repay high-interest loans and cover living costs.

Sources: FSS, Money Auction, Pop Funding

<Comparison of Lending Rates>

Crowd Funding Banks Savings Banks Private Loan 26.2% 7.8% 37.3% 15.7% Note: As of end-July 2012 (Crowd Funding), as of end-May (banks, private loans), as of end-March (savings banks)

• 2. Crowd Funding in Korea

<Case> Money Auction/Pop Funding

Korea Finance Platform

Design/management of financing service platform, Membership management, authentication, etc Social consumer finance Social financing/investment Right on loans Intermediation of rights on loans Service

Individuals/Company

Investor, Lender

Loan Managers

Contracts/post-management E-contract Right on loans Intermediation of rights on loans Service Service

Angel Investors

Right on loans Service

Contents

1. Introduction 2. Crowd Funding in Korea 3. Characteristics of Crowd Funding 4. Potential to Support SMEs in Korea

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1. Introduction 2. Crowd Funding in Korea 3. Characteristics of Crowd Funding 4. Potential to Support SMEs in Korea

• 3. Characteristics of Crowd Funding - Strengths

<Strengths>

Description

• 1. Financial Inclusion

Supports individuals and SMEs that have limited access to formal lending services that require excellent credits, collaterals or apply uniform evaluations.

• 1. Financial Inclusion

Supports individuals and SMEs that have limited access to formal lending services that require excellent credits, collaterals or apply uniform evaluations.

• 2. Mitigates

Information Asymmetry

The participation of a crowd ensure a more thorough evaluation of projects, enhances business transparency, and reduces information asymmetry.

• 3. Risk Distribution

Diversifies investors and investment destinations to distribute risks.

• 4. Lower Costs

Utilizes social networks to reduce investment costs.

• 3. Characteristics of Crowd Funding – Weaknesses

<Weaknesses>

Description

• 1. Intellectual Property

Hard to protect intellectual property (project ideas) due to transparent information.

• 1. Intellectual Property

Hard to protect intellectual property (project ideas) due to transparent information.

• 2. Insufficiently-informed

Decision

Intuitive decisions often outweigh logical judgment.

• 3. Profit Sharing

Profit allocation is unclear in investment-type crowd funding.

• 4. Regulations on

Advice/Recommendation

Regulations on investment advice/recommendation are unclear. * For example, in the US, it is controversial whether posting the list of investors on a funding site can be seen as advice/recommendation.

• 3. Characteristics of Crowd Funding – by funding type

Investment type

• Angel investment for start-ups and small-capital venture

Lending type

• Online micro credit, P2P finance, etc
• Generally, investors acquire shares proportionate to the amount of investment
• Online micro credit, P2P finance, etc
• It can raise investment faster than other methods (average 4.8 weeks)

Non-monetary return type

• It is used mostly in the areas of stage performance, music, film,

education and environmental movements

Donation type

• Sponsorship, charity, donation without compensation in return

• 3. Characteristics of Crowd Funding – by funding type

Investment/Lending platforms can be quite efficient for digital contents (app, computer game) and projects on film, music and literature.

• They are widely used for digital-related projects that are easier to

introduce and promote online.

<Share of Investment by Project Type> <Share of Investment by Project Type>

Note: 92 platforms as of 2011 (with market share over 95%) Source: Massolution

Software, Internet Computer, Communications Media Environment Consumer Goods Others

• 3. Characteristics of Crowd Funding – by funding type

Investment type has advantage in mobilizing a large amount of money, and its importance is rising as a funding source for small start-ups and SMEs. <Average Funding Amount by Type>

Note: 92 platforms as of 2011 (with market share over 95%) Source: Massolution

Donation Lending Non-monetary return Share investment

Contents

1. Introduction 2. Crowd Funding in Korea 3. Characteristics of Crowd Funding 4. Potential to Support SMEs in Korea

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1. Introduction 2. Crowd Funding in Korea 3. Characteristics of Crowd Funding 4. Potential to Support SMEs in Korea

• 4. 4. Potential to Support SMEs in Korea

In Korea, angel investment and venture capital have declined significantly in recent years, and government supporting financing is concentrated in a limited areas.

Option Description Reason

<Limited Funding Options for SMEs>

Option Description Reason Angel Investment In 2010, the amount of investment was KRW32.6 billion, steadily falling from the peak in 2000 (KRW549.3 billion) A main reason is information asymmetry, and angel investment in Korea is different from abroad as it lacks business feasibility study Venture Capital The investment decreased to KRW12.2 billion in 2011, from KRW22.5 billion in 2007 Poor management of venture capital; overall slump in IPO market Investment through venture capital cooperatives temporarily rose in 2011, but fell back in 2012. Government supporting Financing Lack of diversity as technology-related businesses take 92% of funding.

• 4. Potential to Support SMEs in Korea

A virtuous funding cycle is obstructed by an entry gap in the start-up stage and an equity gap in recovery of investment.

<Business Lifecycle and Funding>

Policy Financing Angel Investor Venture Capital IPO / M&A (Securities Firms) Corporate bonds/CP ( “ ) PEF ( “ )

Start Growth Maturity Stable Growth/ Restructuring

[Entry Gap] [Equity Gap]

Crowd funding can narrow entry gap in direct funding by supporting self-employment, small-sized venture and SMEs.

• 4. Potential to Support SMEs in Korea
• Specifically, it can mitigate information asymmetry to attract angel investment, and

provide more money coupled with matching funds

• Also, the burden of responsibility is smaller compared to direct investment

<Ideal Mechanism of Investment-oriented Crowd Funding>

Individual investor 1 Investor 2 Investor N Matching Funds Angel Investment Venture Capital (Cooperatives) Investment Subject Agent

<Ideal Mechanism of Investment-oriented Crowd Funding>

Once a primary market framework is established, a secondary market can be promoted.

• 4. Potential to Support SMEs in Korea
• Secondary funds will help expand available information in private equity

market, reduce information asymmetry, and meet various liquidity demands from angel investors, venture employees and businessmen.

The secondary funds are gradually growing in Korea backed by policy support. The secondary funds are gradually growing in Korea backed by policy support.

(KRW 100 mil)

(%)

<Share of Secondary Funds in All Cooperatives>

All federations (left) Secondary funds (left) Share (right)

• 4. Potential to Support SMEs in Korea

Crowd funding can help overcome limitations of traditional funding markets such as KOSDAQ; however, a flexible regulatory framework should be built to protect investors and support open innovation.

• To protect investors, an obligation may be imposed to disclose

financial status of business as well as overall management conditions.

• To protect investors, an obligation may be imposed to disclose

financial status of business as well as overall management conditions.

• To facilitate investment and contract of crowd funding on the

internet, infrastructure should be enhanced (e-signing, e- authentication) to allow small-sum online investment.

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