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The Angel Investor Perspective on Equity Crowdfunding

Written by M. Brodersson, M. Enerbäck & M. Rautiainen

Paper category

Master Thesis

Subject

Business Administration>Entrepreneurship

Year

2014

Abstract

Master Thesis: When starting a business under equity gap, entrepreneurs usually start with their own savings. If more funds are needed, the typical action is to seek so-called "love money" from friends and family (Wetzel, 1983; Coveney & Moore, 1998). However, these resources will eventually dry up, and entrepreneurs must find sufficient funds elsewhere. In the second stage, most entrepreneurs turn to formal resources such as venture capitalists (hereinafter referred to as VC) and banks (Coveney & Moore, 1998). However, these two main external sources of funding are less and less interested in funding startups, so only a few successful people have access to the financial resources they seek. Therefore, it is between these two stages that the author discovers the so-called "equity gap", which may be regarded as the biggest obstacle to entrepreneurial growth (Wetzel, 1983; Coveney & Moore, 1998). The equity gap (also known as the equity capital gap or equity financing gap) is an observed problem between "the needs of individual entrepreneurs seeking funds and the requirements of the institutions that formally provide funds" (Coveney & Moore, 1998, p. 6). This does not include AI investment (Wetzel, 1983). The reason why banks and venture capital companies no longer make such investments is that they are not interested in financing entrepreneurs, ie. Due to the historical reasons of losses in the 1990s and the higher risks associated with early investments (Coveney & Moore, 1998; Månsson & Landström, 2006). Bridging this gap is considered to be one of the main challenges faced by entrepreneurs, and in many cases is the main reason why startups fail to realize their full potential (Coveney & Moore, 1998). Entrepreneurial enterprises find it difficult to find the necessary funds during the start-up and growth stages. The way many entrepreneurs successfully bridge this gap is through informal venture capital providers (ie AI) to invest in little-known informal enterprises. The capital sector ( Wetzel, 1983; Coveney & Moore, 1998). The problem is that these sources are not obvious. Even though most entrepreneurs have heard of AI, they don't know who these AIs are and where they can be found. This is because the number of AI is unknown and may be unknowable, but once you find one, you are likely to find more, because AI is often found in clusters formed by informal networks (Wetzel, 1983 ). 2.2 Although angel investors have conducted a lot of research on informal venture capital, there is still no consistent definition of artificial intelligence. Previous studies have used many different inconsistent definitions, among which artificial intelligence, business angels, and informal investors are used to distinguish one from another, but often have the same meaning (Avdeitchikova et al., 2008). In addition, Avdeitchikova et al. 2.3 Crowdfunding Belleflamme et al. (2011) provides a broad and accurate definition of modern crowdfunding, which can include all its components, describing this concept as the “public solicitation” of financial resources through the Internet. This is a process of raising funds, which essentially involves three aspects: entrepreneurs seeking funds, a crowd of potential investors, and CFP transactions between the two. If the funds are not based purely on donations, investors can obtain, for example, rewards or company voting rights in exchange for monetary contributions (Hemer, 2011; Belleflamme et al., 2011). Hemer (2011) concluded that although crowdfunding cannot replace the traditional sources of venture financing, especially in the later stages, it should be supported and recognized because it is one of the few tools that can mobilize private capital in the early stages of company growth. In addition, according to the Crowdfunding Industry Report (2013), successful crowdfunding activities have greatly shortened the path from idea to market, especially if crowdfunding products or services stimulate the interest and attraction of the crowd (Crowdfunding Industry Report, year 2013). Agrawal, Catalini, and Goldfarb (2011) believe that the Internet has contributed to the globalized world and suggested crowdfunding to “eliminate most distance-related economic frictions” (page 1), so that entrepreneurs may gain more Fund investors pass CFP. 2.3.1 The concept of crowdfunding from crowdsourcing to crowdfunding originated from the term crowdsourcing (Hemer, 2011; Belleflamme et al., 2011), a phenomenon created by Jeff Howe in 2006 (Kleemann et al., 2008) To put it simply, art outsources certain operations to an undefined and usually large group of people, called the crowd. When talking about crowdsourcing, public appeals can be interpreted as calls to action or calls for support. Especially for crowdfunding, this kind of support is capital. In a public conference call, the target is not any specific individual, but anyone who hears the call (crowdfunding industry report, 2013). Crowdsourcing activities can be used to obtain feedback, ideas, and solutions, for example, about certain products or services. A good example of effective crowdsourcing is the case of Wikipedia, which is using the spring of "collective wisdom", "No one knows everything, [but] everyone knows something" (Lévy, 1997, p. 13-14 Page). This is consistent with Surowitzki's thinking in his book "The Wisdom of the Crowd" (2004), that is, the wisdom of a large group of people is greater than that of a few "elite". This theory can explain the rapid growth of crowdsourcing. Read Less