Utilizing Crowd Funding Utilizing Crowd Funding for Support SMEs funding for Support SMEs funding 2013. 04 Young Do Kim, Research Fellow Korea Institute of Finance 1
Contents 1. 1. Introduction Introduction 2. 2. Crowd Funding in Korea Crowd Funding in Korea 3. 3. Characteristics of Crowd Funding Characteristics of Crowd Funding 4. 4. Potential to Support SMEs in Korea Potential to Support SMEs in Korea 2
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 Small investment B C Online Funds Projects (SW development, film directing) Platform D E F
1. Introduction A home-grown funding platform that combines P2P financing with IT elements of SNS. <Traditional Lending> <P2P Lending> <Crowd Funding> Crowd funding platform consen sus Web platform Intermediary Fund Seeker Fund Seeker Fund Seeker conse nsus Direct lending Deposit Web info Credit making/ Interactive production/al monitoring of gorithm information lending/credit rating
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 - Investment type: Fund providers acquire shares of a venture business and receive dividend(or return) for their investment. 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. 1. Introduction Introduction 2. 2. Crowd Funding in Korea Crowd Funding in Korea 3. 3. Characteristics of Crowd Funding Characteristics of Crowd Funding 4. 4. Potential to Support SMEs in Korea Potential to Support SMEs in Korea 6
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 - By amount, “lending type” is most frequently used, and by the number of project, “donation type” is most common. number of project, “donation type” is most common. - Recently, “investment” type is growing to fund startup businesses. - 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 170 complete or ongoing culture/art projects Tumblbug Contents in culture, art, IT, venture businesses Fundu Donation Good Funding Fund-raising for the film “26 Years” Upstart Small-sized creative projects Sponsor/Donation Concrete Mostly in art/welfare areas Sponsor/Share Business sponsor, share investment, lending Opportune Investment/Lending Money Auction For individuals and small-sized businesses Lending Pop Funding For individuals and small-sized businesses Source: Data from surveyed companies
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. <Comparison of Lending Rates> 37.3% 26.2% 15.7% 7.8% Crowd Funding Banks Savings Banks Private Loan Note: As of end-July 2012 (Crowd Funding), as of end-May (banks, private loans), as of end-March (savings banks) Sources: FSS, Money Auction, Pop Funding
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 Service Service Intermediation of Intermediation of Right on loans Right on loans rights on loans rights on loans Right on loans Angel Loan Managers Investors Service Service Contracts/post-management E-contract Individuals/Company Investor, Lender
Contents 1. 1. Introduction Introduction 2. 2. Crowd Funding in Korea Crowd Funding in Korea 3. 3. Characteristics of Crowd Funding Characteristics of Crowd Funding 4. 4. Potential to Support SMEs in Korea Potential to Support SMEs in Korea 12
3. Characteristics of Crowd Funding - Strengths <Strengths> Description Supports individuals and SMEs that have limited access to formal lending Supports individuals and SMEs that have limited access to formal lending 1. Financial Inclusion 1. Financial Inclusion services that require excellent credits, collaterals or apply uniform evaluations. services that require excellent credits, collaterals or apply uniform evaluations. 2. Mitigates The participation of a crowd ensure a more thorough evaluation of projects, enhances business transparency, and reduces information asymmetry. 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 Hard to protect intellectual property (project ideas) due to transparent Hard to protect intellectual property (project ideas) due to transparent 1. Intellectual Property 1. Intellectual Property information. information. 2. Insufficiently-informed Intuitive decisions often outweigh logical judgment. Decision 3. Profit Sharing Profit allocation is unclear in investment-type crowd funding. Regulations on investment advice/recommendation are unclear. 4. Regulations on * For example, in the US, it is controversial whether posting the list of Advice/Recommendation 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 - Generally, investors acquire shares proportionate to the amount of investment Lending type - Online micro credit, P2P finance, etc - 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> Software, Internet Computer, Communications Media Environment Consumer Goods Others Note: 92 platforms as of 2011 (with market share over 95%) Source: Massolution
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> Donation Non-monetary return Lending Share investment Note: 92 platforms as of 2011 (with market share over 95%) Source: Massolution
Contents 1. 1. Introduction Introduction 2. 2. Crowd Funding in Korea Crowd Funding in Korea 3. 3. Characteristics of Crowd Funding Characteristics of Crowd Funding 4. 4. Potential to Support SMEs in Korea Potential to Support SMEs in Korea 18
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. <Limited Funding Options for SMEs> Option Option Description Description Reason Reason In 2010, the amount of investment was A main reason is information asymmetry, and Angel KRW32.6 billion, steadily falling from angel investment in Korea is different from Investment the peak in 2000 (KRW549.3 billion) abroad as it lacks business feasibility study The investment decreased to KRW12.2 billion in 2011, from KRW22.5 billion in Venture 2007 Poor management of venture capital; overall Capital slump in IPO market Investment through venture capital cooperatives temporarily rose in 2011, but fell back in 2012. Government Lack of diversity as technology-related supporting - businesses take 92% of funding. Financing
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