on 20-Jul-2018 (Fri)

Brásidas foi um brilhante general espartano, que se distinguiu durante a primeira década da Guerra do Peloponeso.

Cléon foi um demagogo, político e estratego (general) ateniense, protagonista da Guerra do Peloponeso.

Em 422 a.C., na Batalha de Anfípolis, Brásidas colheu uma expressiva vitória sobre os atenienses, que nela perderam seu comandante, Cleón. Porém, ele também foi mortalmente ferido durante o combate.

The disclosure risk is accentuated in the equity crowdfunding setting since creators must disclose their plans for the company (e.g., strategy, key employees, customers, costs) in
addition to their new product or service.

2nd disincentive for founders comes from the opportunity cost of raising capital from “the crowd” rather than professional investors. Angel investors and VCs, for example, often bring ad- ditional value to the company, such as industry knowledge, relationships, and status (Hsu, 2004). Not only are non-professional crowdfunders less likely to bring these benefits, they are also less likely to make the effort to confer these benefits to the creator (if they could) because the returns for doing so are much lower given their typically much smaller level of investment.

Investor management presents another challenge for founders

Because crowdfunders generally fund in smaller amounts than, say, angel investors, more investors are required to raise a given amount of capital. Investor management therefore may be significantly more costly due to the sheer number of funders who need to be managed. The process can be particularly daunting as the number of investors rises. In the case of the Pebble watch, as of March 2013, the team had delivered 34 detailed updates about the software and manufacturing of the product and received about 14,000 comments from the Kickstarter community. 16 Moreover, whenever a project fails to meet a deadline or expectations, funders typically demand increasing levels of attention. Although such interaction allows creators to collect feedback, it also diverts resources and time from execution. Max Salzberg, who unexpectedly raised $200K on Kickstarter (from a $10K initial target) to develop an open-source alternative to Facebook, described his team’s experience as “so consumed with things like answering e- mails and making T-shirts for their contributors that they had little time to build the software” (Wortham, 2012).

creators have no control over who funds their projects, they have no way to prevent funders with differing visions and strong personalities from joining and adversely affecting the community’s dialogue. Furthermore, in the case of equity crowd-funding, creators may find it difficult to raise follow-on financing with an “unorthodox cap table” that includes a large number of dispersed small investors. However, platforms will likely recognize this risk and structure investments in such a way as to minimize this problem (e.g., aggregate investors in a GP/LP-type structure). In the case of AngelList, for example, investments are “pooled into a fund created and managed by SecondMarket which, in turn, invests in the startup. Only the fund is listed on the startup’s cap table - the individual investors in the fund are not.”

Funders face three primary disincentives: creator incompetence, fraud, and project risk. All three are exacerbated by the particularly high degree of information asymmetry associated with equity-based crowdfunding in an environment with minimal oversight and regulation (i.e., funders have much less information than creators).

Creator Incompetence - To date, funders on crowdfunding platforms have been relatively optimistic about the ability of creators to deliver on their promises. As more projects successfully raise capital and then fail to meet milestones, platforms have realized that it is in their interest to recalibrate the expectations of the community and have thus increased disclosure requirements for creators.

creators often have little experience in building a product and dealing with logistics and suppliers.

Because investments in crowdfunding are small, the risk of fraud is exacerbated by weak individual-level incentives to perform due diligence

To the extent that the cost of performing due diligence is high and the individual benefit low, the crowdfunding community may systematically underinvest in due diligence; instead, funders may free-ride on the investment decisions of others, which is feasible to do since funding information is public and funders usually cannot be excluded.

on a crowdfunding platform, it is particularly difficult for funders to assess the true ability of the creator or the underlying quality of the project or venture.

Furthermore, the imbalance between the two sides of the market is not limited to ex-ante information about creator and idea quality but is also due to the funders’ ex-post inability to induce effort on the side of the creator.

Historically, the “crowdfunding contract” is based on goodwill and offers limited tools to funders once they commit their capital

The creator may behave in a short-term opportunistic manner and not exert the level of effort that was implied at the outset. This is a form of moral hazard. The most extreme example of this is outright fraud.

Traditional markets for the financing of early-stage creative projects or ventures rely heavily on due diligence predicated on face-to-face interactions and personal relationships.

In the crowdfunding setting, creators disclose as much information as they wish and then rely on an ethos of “trust me.” Market design may influence the efficacy of a “trust me” environment by facilitating markets for reputation. In other words, in crowdfunding markets, as in many other online markets, reputation and trust are particularly important.

MILESTONES
Creators on crowdfunding platforms are less likely to repeatedly raise capital over short periods of time, reducing the frequency with which the community can rate them. To avoid this problem and still derive value from an online reputation system, a potential solution is for creators to divide larger projects into smaller milestones (not unlike staged financing in traditional settings, used to reduce funder risk).

reputation can be a powerful antidote to information asymmetry and moral hazard problems.

Crowdfunding platforms continue to adapt their rules in response to user behavior in order to maximize transaction volume. For example, Kickstarter recently allocated additional resources to detect fraud, implying that its management believes the benefits of doing so (lower risk for funders) outweigh the costs (increased monitoring costs for the platform and higher disclosure burden on creators).

Recognizing that some types of projects are more prone to disappointment than others, Kickstarter increased the burden of disclosure on creators of design and technology products:

“In May 2012 we added additional guidelines and requirements for Product De- sign and Technology projects. These include requiring creators to provide information about their background and experience, a manufacturing plan (for hardware projects), and a functional prototype. We made this change to ensure that creators have done their research before launching and backers have sufficient information when deciding whether to back these projects.”

platforms will continually modify their regulations and monitoring as well as react to user behavior in search of striking the appropriate balance between minimizing the disclosure and administrative burdens on creators while maximizing the information available to funders about quality, effort, and risk of fraud.

JOBs act stipulation
platforms must register with the SEC, educate investors (e.g., level of risk, risk of illiquidity), take steps to reduce the risk of fraud (e.g., by performing history checks on officers and directors of the venture or anyone holding more than 20% of the outstanding company equity), and verify that investors have not exceeded their yearly investment limits across all platforms

JOBs: firms will be limited in the amount of capital they can raise through crowdfunding ($1 million cap)
and will be subject to non-trivial disclosure regulations. As the North Amer- ican Securities Administrators Association points out: “The crowdfunding exemption is only an exemption from securities law registration requirements. It does not change the securities law disclosure requirements. The requirements of federal and state securities laws regard- ing disclosures, including disclosures of all material facts and risks to investors, remains in place.”

Much of the existing research on crowdfunding has emphasized that funders rely heavily on accu- mulated capital as a signal of quality (Agrawal, Catalini, and Goldfarb, 2011; Zhang and Liu, 2012; Burtch, Ghose, and Wattal, 2011; Freedman and Jin, 2011).

the sequen- tial nature of investment has the potential of triggering an information cascade. This path dependence suggests that funding success will only reflect underlying project quality if early funders do a careful job screening projects

Furthermore, the information cascade may be manipulated. At the extreme, creators may exploit the path-dependent nature of investment by injecting capital in the early stages, thereby inducing an information cascade, and then withdrawing their capital before the fundraising is closed. Obviously, this problem may be minimized by thoughtful rules and features implemented by platforms. Overall, the evidence suggests that information from the crowd reflected in accumulated capital can be an informative, but noisy, signal of quality

Crowdfunding may influence the rate of innovation by increasing the total amount of funding available to innovative new ventures.

ndeed, Agrawal, Catalini, and Goldfarb (2011) show that the localization bias in funding activity on Sellaband is virtually eliminated after controlling for social relationships (friends and family).

Overall, funding is not localized: A full 86% of capital for successfully financed projects came from individuals who were more than 60 miles away from the creator, and the average distance between creators and funders was approximately 3,000 miles. Thus, it is plausible that crowdfunding may be particularly important as a mechanism to finance projects in regions that have disproportionately less access to financial capital relative to their stock of human capital.

We find that crowdfunding capital follows a surprisingly similar geographic pattern to traditional funding. Our data contain every funded project between launch (June 2009) and October 2012. The data spans 27,403 projects totaling $293 million in 13 categories. We have information on the timing of financing and the location of the projects.

the benefits from crowdfunding will not be uniformly distributed. Certain types of ventures will benefit more than others from this new form of finance. For exam- ple, the types of ventures that may disproportionately benefit include those with consumer products where the value proposition can be easily communicated via text and video and where the product is unique and not subject to easy imitation when publicly disclosed. Even still, these ventures may prefer to raise their funds from traditional sources unless the cost of capital is significantly lower or they are able to derive additional benefits from interacting with a crowd of heterogeneous, geographically dispersed funders.